The mutual fund industry is shrinking.
After two decades of continuous growth, the number of mutual funds available to investors has been falling. Since 2015, there are some 200 fewer products for advisors to include in client portfolios, according to Morningstar, a decline of
“It’s becoming more difficult [for funds] to survive,” says Jeffrey Ptak, global director of manager research at Morningstar.
As fee competition heightens and the number of mutual funds shrinks, the game is changing for fund companies, according to Tom Morelli, head of broker-dealer distribution at T. Rowe Price.
“The competition today is based on your performance, your fees, and then your relationship, while in the past it may have been more focused on the relationship, performance, and then the fee,” he says.
To endure, funds not only need to maintain a high level of performance, they need to have enough customers, he says.
Many funds that get closed are smaller and more expensive, according to Ptak.
Still, not all fund companies are shrinking their offerings. T. Rowe Price has only closed three funds since 2016 and launched 10 new funds.
“We’ve been able to make it through this period of rationalization, not untouched, but we’ve been impacted less than some of the other organizations,” Morelli says.
He attributes this to how the firm’s funds have passed through scans from research groups and consultants.
“To the extent that some of this rationalization helps advisors make the better choices for their clients, I think everybody’s probably better off.”
Fund companies still might have to take costs out of other parts of the business to make up for fee cuts, Ptak says.
“I would say that all things being equal, this is something that is likely to pinch margins,” he says. But he adds: “Even if they’re operating at lower margins, they’re still operating at margins almost every other industry would salivate about.”
How is this affecting advisors?
Currently, it appears to have little impact, but the effects might be felt later down the road.
“You could probably take 2,000 mutual funds out and we wouldn’t see a difference,” says Mark Hogan, a San Antonio, Texas-based financial advisor with Snowden Lane. Still, he added, financial planners seeking an aggressive fund might have fewer choices. That’s because the small, overpriced and niche funds are the ones that are closing, he says.
Additionally, advisors who don’t have as many choices for product offerings might find their options even more restricted.
“I think for the big wirehouses, this consolidation of mutual funds is going to hurt them,” says Jason Inglis, managing partner at ReDefine Wealth Management, an RIA in Denver.
Factors including low interest rates may have contributed to success.
But at the end of the day, fewer mutual funds seems to be a good thing for advisors overall.
“It can make them more efficient because they have to sort through a smaller number of products,” Compelli says.
And, most of all, it will benefit the client, Ptak says.
“To the extent that some of this rationalization helps advisors make the better choices for their clients, I think everybody’s probably better off,” he says.
Inglis says it is a good thing, under certain circumstances.
“Less mutual funds is probably better, but it has to be less of the right funds,” Inglis says.
