Should Japan’s Asset Management Industry Race to Zero Fees?

Why zero-fee investment funds raise a broader question about competition, value creation, and the future of Japan’s asset management industry.

Ahead of the planned launch of Kodomo NISA, Japan’s tax-exempt investment program for children, in 2027, SBI Group has announced an investment trust with a zero annual trust fee, while Rakuten Securities has indicated plans to offer a similar product. In Japan, the trust fee is the recurring charge deducted from fund assets and allocated among the asset manager, distributor, and trustee. After years of fee reductions, competition in Japan’s investment fund market is now approaching zero. Lower costs are certainly welcome for long-term investors. Yet I have long been uncomfortable with the tendency to celebrate free financial products as a victory for competition or a sign of progress for the industry. Is driving fees as close to zero as possible really what the asset management industry should be striving for?

Is Zero Cost Really a Victory for Investors?

I am not opposed to lower fees. Index investing, in particular, lends itself to standardization, automation, and economies of scale as assets under management grow. These factors can genuinely reduce the cost of managing each unit of assets. Passing those savings on to investors is a healthy form of competition. It is also worthwhile to question whether the fees traditionally charged by investment funds have been justified by the value they provide. If products that fail to demonstrate value commensurate with their fees lose investor support, that may be difficult for incumbent providers, but it is a positive development for investors.

But reducing fees and treating zero as the ultimate goal of competition are two different things. Even when an investment trust charges no ongoing trust fee, the work of investment management, fund accounting, custody and administration, disclosure, and risk management does not disappear. Audit expenses, portfolio transaction costs, and certain other expenses may still be borne by the fund. We should distinguish between costs genuinely reduced through economies of scale and costs that are no longer recovered through the fund’s trust fee but are instead funded by revenue from elsewhere in the business. A zero-fee fund is not necessarily loss-making, nor does zero pricing necessarily mean that all costs have been shifted onto another party. The more important question, in my view, is what kind of competition emerges when the stated ongoing fee for an investment product falls to zero.

Whose Interests Shape the Price of an Investment Fund?

One particularly interesting aspect of SBI’s announcement is its plan to offer another fund that invests primarily in the same underlying master fund, known in Japan as a “mother fund,” but charges an annual trust fee of 0.055% for a broader retail investor base. Even when the underlying investment portfolio is substantially the same, prices can differ depending on the target customers and the conditions under which a product is offered. This illustrates how fund pricing may reflect not only the underlying cost of investment management but also customer acquisition strategies and the economics of the broader customer relationship. More generally, offering a zero-fee fund as an entry point to a long-term customer relationship, while generating revenue through other services within a financial group, can be an entirely rational business strategy. There is no reason to insist that every individual product must be profitable on a standalone basis.

However, a pricing strategy that makes economic sense for a financial group is not necessarily the ideal model of competition for the asset management industry as a whole. In Japan, fund distributors that maintain investor relationships, investment trust management companies responsible for investment management and fund administration, and trustee banks that hold and administer trust assets perform different functions. They also face different cost structures and revenue opportunities. Appropriate contractual arrangements or coordination within a financial group may allow these parties to receive compensation for their work. Even so, if competitive advantage increasingly depends not only on investment expertise and operational productivity but also on the size of a firm's customer base or the earnings generated by its other businesses, specialist asset managers may find it harder to compete on their investment capabilities alone. The issue is not whether large financial groups should be allowed to offer low prices. It is what kinds of capabilities the market will ultimately reward.

An Industry That Competes on More Than Price

My greatest concern is that competition in asset management could become excessively concentrated on a single measure: how low a fund's management fee can go. Price can be compared before an investment is made. By contrast, the consistency of an investment philosophy, the discipline of investment decisions, risk management, product design, and suitability for an investor's objectives cannot easily be evaluated on the same scale. If low fees become the easiest justification for selecting a fund, and fee reductions become the most visible competitive tool for both asset managers and distributors, will firms have less incentive to invest in creating and communicating these other forms of value? That is the concern at the heart of my argument.

Of course, high fees are no proof of superior investment management. Low-cost index investing delivers substantial value to investors in its own right. Firms that claim to offer differentiated investment capabilities have an even greater responsibility to explain their results after fees, their risk characteristics, and the soundness of their investment processes. Price competition may also encourage innovation and differentiation. For these reasons, I do not support restricting competition to protect the profit margins of established asset managers or preserve the number of funds in the market. Yet if low prices alone become the most recognizable sign of success, both management resources and investor attention may become disproportionately focused on price. What we need is a market in which efforts to reduce costs and efforts to create value beyond price are both properly recognized and rewarded.

An Asset Management Industry That Prospers Alongside Investors

There is nothing inherently inconsistent between an asset management firm earning profits and acting in its clients' best interests. A firm can deliver genuine value to investors, receive compensation they consider reasonable, and reinvest the resulting profits in people, research, technology, product development, and investment governance. Those investments can, in turn, help the firm deliver better investment management and services to its clients. Profit is not merely a financial return to the provider. It is also a source of capital for creating future value. Moreover, the role of the asset management industry extends beyond helping households build financial assets. By identifying investment opportunities and improving the allocation of capital to companies and businesses, the industry is also expected to contribute to the growth of Japan's economy. I believe the ideal is an asset management industry in which better outcomes for investors support the growth of asset management businesses, and that growth, in turn, contributes to the broader development of the Japanese economy.

I respect the business decisions of firms that choose to offer investment funds with zero trust fees, and I have no doubt that lower costs can improve investors’ long-term returns after fees. Even so, I do not believe that making investment products free—or simply cheaper and cheaper—should be celebrated as a measure of progress for the industry. We should compete not to see who can charge the least, but to deliver products and services that investors genuinely believe are worth paying for, and to reinvest the profits earned from doing so in the next generation of value creation. An industry that increases the value investors receive can prosper alongside them and contribute to a stronger Japanese economy. That is the kind of competition I want to see take root in Japan.

Author: Keiichi Ohara, President & CEO, JAMP Corporation
About This Article
This article is an adapted English edition of JAMP Perspective No. 357, originally written in Japanese by Keiichi Ohara and distributed on November 4. It has been edited and supplemented where necessary to make the discussion and its Japan-specific context clearer to readers outside Japan. It is therefore not a direct translation of the original Japanese newsletter.

This article is provided for informational purposes only and does not constitute investment advice or a recommendation regarding any financial product.