Why Do Money Fund Managers Voluntarily Waive Their Fees?

Abstract

Over half of money fund managers voluntarily waive fees they have a contractual right to claim. Moreover, as a consequence of fee waivers, funds on average collect one half of reported expense ratios. Variation in fee waivers is significant and relates to differences in relative performance. Both low-performing retail and institutional funds waive fees to improve their net performance. More interestingly, high-performing retail, but not institutional, funds use fee waivers to strategically adjust net performance to increase expected fund f lows. Despite fund f low incentives, high-performing institutional funds do not waive more because they cannot significantly improve their relative performance. THIS PAPER INVESTIGATES THE OPTIMAL management fee under the assumption that it is not fixed but variable throughout the year. We argue that fee waivers are an indirect method of setting f lexible performance-based fees in an industry that has historically adopted a fee structure that is nominally f lat. To circumvent a suboptimal fixed structure, managers nominally charge higher contractual fees and then selectively waive these fees. The number of money market funds that waive fees has increased over time from 40 percent in 1980 to 63 percent by 1995. In 1995, the gross contractual expense for a typical money market mutual fund was approximately 45 basis points of net assets. For a fund that waived fees, the average waiver was approximately 23 basis points of net assets, or over half a million dollars.

Demand Curves and the Pricing of Money Management

“…The results are robust to the choice of c. 10 Our assumption that funds can move prices up or down from one day to the next represents the widespread practice of fee waiving. Christoffersen (2001) shows over 60% of retail money funds waiving fees in 1995. These funds can generally start charging more or less on any day, without approval from shareholders.…”

“…We maximize this benefit by focusing on a single subcategory, the largest, of retail money funds. Also, we need funds that can adjust fees up or down at will, which describes most money funds due to the widespread practice of fee-waiving (Christoffersen (2001)). And finally, we don't want interference from the capital-gains tax.…”

Managerial Rents vs. Shareholder Value in Delegated Portfolio Management: The Case of Closed-End Funds

“…The results in Model (1) show that past NAV performance and normalized premium significantly predict fee increases, but neither predicts fee decreases: management fees tend to 18 In OEFs, changes in effective fee ratios are often due to management companies introducing or dropping fee waivers (Christoffersen (2001) reports that over half of open-end money market funds waive fees in a typical year in her sample). However, this is not the case with CEFs.…”

“…Christoffersen (2001) shows that money market funds tend to waive more fees when they underperform, and that funds use fee waivers strategically to increase expected fund flows. Warner and Wu (2011) find that OEFs with superior performance are more likely to increase fees, but they also find that high asset growth at both fund and family levels are associated with a higher probability of fee decreases.…”

Mutual funds withdraw shield: performance or agency costs driver?

“…There is consensus amongst researchers that capital fund flows are sensitive to past performances in developed markets (Goetzmann and Peles, 1997;Sirri and Tufano, 1998;and Christoffersen, 2001), but for a small market Alves and Mendes (2011), instead of the convex flow-performance relationship usually documented for the US, found an absence of reaction to past performance. There is also evidence that back-end load costs are an obstacle to performance reaction (Alves and Mendes, 2007).…”