The battle over ETFs has recently progressed into all-out warfare. Vanguard and BlackRock, among others, have been continually trying to undercut each on large vanilla ETFs, and now Deutsche Bank is making its impact on the market. DB runs a large high yield bond ETF and it just cut its fee from 25bp to just 20bp, or roughly half of its two big competitors, BlackRock and State Street. Many analysts think the price of ETFs will soon fall to 0% for large vanilla offerings. Morningstar says “Despite all the new products, investor interest is still mostly for plain vanilla, cheap products. And that’s where we’ve seen the flows go this year”.
FINSUM: We definitely think funds are going to start marketing their huge vanilla ETFs free of charge, as they can make enough money from auxiliary businesses that capturing these assets for free makes sense.
Beset by an unstoppable surge into passive investment vehicles, the active management industry is in the midst of a broad overhaul. One part of the big change taking place is in fees. Fidelity announced recently that it was dropping its flat fee on assets for actively managed funds in favor of a performance fee only. AllianceBernstein is set to launch six new funds with a similar structure.
FINSUM: The active management industry is trying to fight the perception that it offers poor value, and moving to this model, which is basically success fee-based, will help. However, it will likely change the risk-return profile of asset management stocks as they will be much less insulated from the broader market environment.
Everyone knows active management is in trouble, but it is very unclear what the future will exactly be. No one seems to think the sector will die off, only morph into something new. The view of what that something might be started to become a bit more clear this week as Fidelity, a major asset manager announced it was completely changing its fee structure. The manager said it would do away with ongoing flat fees on actively managed funds, and instead install a performance fee model. The move brings Fidelity’s business model closer in line with how hedge funds have typically done business. It has not yet announced the level of fees, only the change in structure.
FINSUM: This is going to make a drastic difference to their cash flow, operating structure, and exposure to market movements. This will likely change the perception of asset managers being considered safe and steady, as the earnings profile will likely evolve to be more like an investment bank’s.
Robo advisors continue to rattle the wealth management industry. However, Charles Schwab has developed a new plan to outcompete them. Its strategy is to continually lower prices and shrink revenue as a way of keeping clients and potential clients from having an incentive to switch to pure robos like Betterment or Wealthfront. Schwab currently runs its own robo platform, called Schwab Intelligent Portfolios, and has $18 bn under management. The firm points out it has already cut its fee from around 80 basis points to around 20.
FINSUM: So continually shrinking revenue is the plan? The margins must be very strong in robos, which will allow them to do this. Additionally though, they are probably willing to sacrifice revenue to keep AUM from flowing to competitors.
Big ETF providers have been in a war on fees for some time, but until now there was one part of the ETF world that seemed immune from the ruthless price cuts—smart beta. Smart beta, or the name for the group of funds that customize their replication of an index, had been carrying relatively high fees of around 0.4%, well above the 0.09% that is now common for large vanilla ETFs. The had led some active managers to adopt the strategy and it was hoped that smart beta might be the area where profit margins could be insulated. That illusion is now gone, as Goldman Sachs has just debuted a smart beta fund at just a 0.09% fee, or just $9 per $10,000 invested per year, part of a trend of price cuts.
FINSUM: Smart beta pricing is dropping rapidly and its premium over vanilla funds is evaporating. Good for investors.