While this story is older, I still view it as being overly optimistic. Fund management companies will find a way to make their money, somehow.
The Economist had some very interesting articles about how the Fund Management industry is getting squeezed for revenues thanks to upstart Management Firms charging less and less for their funds (and Index Funds cutting the legs out from under them). The two articles are Will Invest For Food and Cheap is Cheerful , are well worth reading and are quite enlightening. Thanks to technology and some very cut throat trickery going on in the industry, things are getting better (slowly) for the regular investor (but we are far from Nirvana in terms of management fees).
Reading those articles reminded me of what happened in the world of Long Distance telephone call revenues. For decades long distance phone call revenue was the bread and butter of the phone industry, and the revenues were quite spectacular. Money was made hand over fist and many projects were subsidized by the Long Lines cash cow.
Did you realize that you wouldn’t have LINUX right now if it weren’t for AT&T Long Distance phone income? The late Dennis Ritchie and Brian Kernighan would tell the story of when they went “hat in hand” to the AT&T board to have their exciting Multics operating system funded for a few more years, and thanks to AT&T’s huge long distance income that was made possible, which let Multics, turn to UNIX then to LINUX, and beyond! Someone on the board pointed out the funds they were asking for was about 3 minutes of income (over the entire year) from the AT&T Long Distance lines (now that is a Cash Cow)
Time passed and the world started changing, legislation came in to break up the AT&T long distance monopoly, more competitors appeared on the horizon and how the phone networks worked changed as well. Suddenly the Long Distance Cash Cow got sick, and as the milk dried up, so did the Long Distance income for most phone carriers. Today the cost of long distance calls to most of the world is pennies a minute (if not effectively free), and there is very little money to be made (except where predatory gouging is allowed (like in the wireless world, but that is for another day)).
From what I am seeing there seems to be a Paradigm Shift going on in the investment world similar to what happened in Telecommunication and Long Distance income, with a few differences. In Telecomm a lot of the change happened due to the legislated break up of AT&T in the U.S. and orthogonal technology changes, but maybe the forces in the financial world are not so different.Â Is there going to be legislation in Canada to limit the fees charged on Mutual Funds, Hedge Funds, Index Funds and the like? I doubt that will come to pass (but you never know, I suppose), but the marketplace may drive the process in the correct direction (for once), but the technology changes on how the Fund Management firms work are changing quickly as well.
Conclusions on Mangement Fees ?
Can we expect all Mutual Funds to have low management fees? No, but hopefully many ETFs will have cheaper management fees.