Mutual Funds Expenses on the Rise?

Believe it or not, mutual fund fees actually dropped a small amount last year. According to Morningstar Principia, the average expense ratio for actively managed domestic equity funds was 1.52 percent for 2004 compared to 1.55 percent for the previous year.

Will the trend continue? Not bloody likely! Why? According to Robert Casey's article in the April, 2005 issue of Bloomberg Wealth Manager (sorry, there is no link), there are reasons why this is not a trend.

1. 2004 saw a lot of consolidation. Smaller mutual funds, which are usually associated with higher fees, were either closed down or merged into larger funds resulting in lower average fees for the industry as a whole. Consolidation won't go on forever.

2. 2004 saw Eliot Spitzer on a rampage. No fund in their right mind would attempt to raise fees while Spitzer is on the loose. Once he has moved on to attempt the governorship of New York mutual fund companies can start thinking about raising fees again.

3. Although Spitzer has been after fund companies for excessive fees and "market timing," the results will mean more oversight, which will mean more expenses. Funny how it all works out isn't it? Who knows, we may have been better off if things would have just stayed the way they were.

So, investors can expect mutual fund fees to increase in the next few years. Maybe investors should be looking to index funds as a better option to actively managed funds?