The Economist Magazine on Fund Management

my bolds full article here

...The general rule of fund-management consolidations is that they may be a good deal for the companies, but they rarely bring much benefit to investors, for two reasons. First, retail fund managers compete on past performance rather than price. Alas, a good performance one year tends not to be repeated the next; but the fees carry on. Second, because of their inertia, retail investors tend not to buy funds; funds are sold to them. Fund managers must pay banks and brokers to distribute their products, and they claim back that money from investors. As a result the bestselling funds often have the highest charges; other things being equal, they represent the worst deal for investors.
The price is wrong

That second factor helps explain why there is a stark difference between America and Europe. In America, where retail investors are more willing to buy funds directly, the expense ratios of mutual funds have declined for four successive years, according to Lipper, a provider of financial information. But in Europe, where funds are largely sold through banks, annual management fees have steadily risen, from 1.3% in 1994 to 1.6% last year. Retail fund-managers have fed themselves well, but their investors have been left with the scraps.

Even institutional investors such as pension funds and insurance companies, which ought to have the clout to force down fees, are paying more. A survey by Watson Wyatt, a consulting firm, found that the cost of running a pension scheme increased by around half between 2003 and 2008. That was because schemes allocated more of their portfolios to hedge funds and private-equity managers, which charge much higher fees. Chasing performance by paying higher fees might work for individual investors, but in aggregate it is doomed to fail. The return to the average investor is the market return minus costs; if costs rise, returns must fall.

Retail investors, in particular, would do well to learn that lesson, and take responsibility for their own finances. Just as they shop around to find the best estate agent, they can seek out low-charging vehicles such as exchange-traded funds. If enough investors focus on cost, not performance, the fund-management industry will have to give them a better deal.