Public Fund Fee Reform Challenges Small and Midsize Institutions (AI Translation)

【周刊提前读】公募基金降费改革拷问中小机构生存难题

Over the past two years, China’s mutual fund (public offering fund) industry has undergone significant fee-cutting reforms, transforming its operational landscape and intensifying the quest for scale as the industry’s main survival strategy. A sweeping structural fee adjustment began in July 2023, which started with reducing management fees for actively managed equity funds and expanded to address transaction commissions, sales fees, and disclosure mechanisms. These reforms exposed previously hidden costs, including research, data terminal usage, index licensing, sales incentives, and market-making service fees, which now must be absorbed by fund companies themselves. As profit margins shrink, expanding the asset base has become the top goal. However, highly stable mandates like enterprise annuity licenses are scarce, and intense product homogeneity has made it difficult for fund performance to stand out among thousands of offerings, confounding investors and fund managers alike [para. 1][para. 2][para. 3].

The decline of the long-established “soft dollar” system—a practice by which fund management companies routed trades through brokers paying high commissions in exchange for research and services—has been pivotal. Regulatory changes in 2024 mandated reductions in stock trading costs and prohibited using commissions to cover non-cash services. Consequently, split commission income for brokers plummeted by 35% to 10.986 billion yuan in 2024 from 16.835 billion yuan in 2023. The new rules have most visibly impacted market-making for ETFs: fund management companies are now directly responsible for paying market-making costs, diminishing their incentive to do so. For instance, supporting 10 ETFs with a starting capital of 1 billion yuan each at a typical market-making interest of 5.5% annually leads to costs exceeding 100 million yuan per year for leading companies. Index licensing fees—now solely borne by the fund managers following a 2025 regulatory update—also compound the pressure, with top-ten ETF houses spending from 16 million to 150 million yuan annually at a reduced 0.024% fee rate [para. 4][para. 5][para. 6].

Middle- and smaller-sized fund companies face tightening margins and survival threats. To break even, a fund house with fewer than 50 employees needs at least 10 billion yuan in total assets, with actively managed equity products comprising at least half. However, of the 199 mutual fund licenses, 59 run funds below this threshold. Shrinking revenues force companies to slash costs, leading to operational hardships, system upgrade challenges, and increasing personnel turnover. The cost of critical operational systems such as trading, valuation, and TA (transfer agent) systems can reach 5–20 million yuan per year, a heavy burden for small players. They are also disadvantaged in launching innovative or index-focused products due to scale requirements and limited brokerage relationships. Meanwhile, public funds without enterprise annuity licenses face high volatility as their income depends more on retail investment and fluctuating equity markets. The consolidation and strategic prioritization of fund managers holding these coveted licenses underscore their significance: as of Q1 2025, enterprise annuity and occupational pension assets exceeded 6.8 trillion yuan nationwide, providing stable fees for qualifying firms [para. 7][para. 8][para. 9].

The challenges are greater for foreign wholly-owned fund management companies, which usually lack scale and face high operating costs. Since 2020, despite regulatory easing, investment restrictions, branding barriers, and distribution challenges have prevented them from gaining material market share or delivering superior performance. Most have assets under 10 billion yuan, with notable exceptions being J.P. Morgan (175.2 billion yuan) and Manulife (>90 billion). Fund performance and scale remain the deciding factors for survival, as illustrated by the sharp drop in ordinary actively managed equity funds (from 850.7 billion to 523 billion yuan between 2021 and mid-2025) and modest performance returns. The consensus among smaller firms is that, absent scale advantages, excelling in investment management and delivering exceptional fund performance is the sole route to sustainability, especially under volatile market conditions and intensified competition [para. 10][para. 11][para. 12].