(New York)

Advisors need to prepare themselves for a nasty eventuality that looks like a near certainty when the market next crashes. According to a top wealth management lawyer, there are likely to be a great deal of lawsuits filed by clients against their advisors whenever the next big crash comes. The lawsuits will be focused on claims of reverse churning, or that advisors put client money in fee-baseds account in order to collect fees without offering significant advice or trading. Since switching clients into fee-based accounts (versus commission-based accounts) has been a very common practice over the last several years, the atmosphere is ripe for a massive wave of lawsuits.

FINSUM: This article is worryingly insightful. The big switch to fee-based accounts, which preceded but also corresponded to the DOL rule, might have set up advisors for some major legal headaches in the next downturn.

Published in Wealth Management

(New York)

If there was ever a mantra for mutual funds, it should be this: boring and cheap is beautiful. A new study by Morningstar has found that when it comes to the funds, investors are best off buying ones with very cheap fees, and not just for the obvious reasons. Morningstar dug deeper to understand the relationship between costs and performance gaps, or the spread between the return of the fund itself versus the fund’s average investor. What it found is that in low price funds, this gap was much smaller. While some of that might be accounted for by simply saying those who buy cheaper funds are smarter investors, the reality is that investors are more patient on returns when they hold cheaper funds. There is less incentive to sell, and therefore they hold the funds longer, leading to better returns.

FINSUM: This makes perfect sense to us. If you have an expensive fund that is losing money, you are going to want to dump it quickly. But if a fund is ultra-cheap, you are more inclined to give it some time.

Published in Eq: Large Cap
Friday, 03 August 2018 09:42

How Zero Fees Will Change the Industry

(New York)

It was long awaited, but still hit the market like a hammer. It was one of those things that you can prepare for over a long period, yet are inevitably shocked when it arrives. In this case, it was the long-awaited release of a zero fee index fund. Fidelity was the first to do it, and while it was anticipated, the move is likely to have far-reaching effects on the industry. For instance, one of the big changes is that large index funds will likely no longer pay licensing fees to the indexes themselves. At the same time though, indexes will proliferate for more narrow and niche areas designed to track all manner of themes. Fees will likely continue to fall, even on the more complex products.

FINSUM: Asset management is seeing a very serious race to the bottom, which is reflected in share prices lately. Two thoughts come to mind. Firstly, those with huge scale will be the big winners as the industry grows more consolidated. Secondly, how long before retirement funds seeing a reckoning and a big move out of expensive products (they are paying an average of 61 bp in fees)?

Published in Wealth Management

New York)

Fidelity made history this week by introducing the first zero fee funds, which will track very broad self-indexed markets. Fidelity’s move is somewhat of a ploy, and definitely a demonstration of scale, as the company has many ways to profit from a customer once it has them in the door. But don’t be fooled, as fees aren’t everything. In fact, there are significant differences in performance even between index trackers of the same benchmark, like the S&P 500, and the differences between them can add up to a whole lot more than the difference in fees. For instance, Schwab and Vanguard already have broad index trackers at 3 and 6 basis points of fees, so hardly a big difference to zero, especially if their performance is better.

FINSUM: “Zero” definitely changes things, but once you are in the sub-15 bp fee category, performance is going to make a bigger difference than fees.

Published in Wealth Management
Thursday, 02 August 2018 09:17

Fidelity Just Crossed the Line on Fees


The moment that many asset managers have been dreading has finally arrived. Fidelity announced yesterday that it was slashing prices on many of its funds, and crucially, offering two new index mutual funds with no fees and no minimums. Thus, the Rubicon has finally been crossed—the first broad index funds with zero fees, and no minimums. Many top asset management stocks fell considerably on the news. Remember that asset managers can still make money on funds with zero fees—through stock lending—but they need considerable scale to make that money meaningful.

FINSUM: It was only a matter of time before this happened. We expect Vanguard will follow suit quite soon, as will BlackRock, as lower fees have been by far the biggest selling point in the market for years.

Published in Wealth Management
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