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.
Mutual funds and ETFs have been making it a lot easier to add alternative investments to a portfolio. But Barron’s argues that refraining from doing so might be a good idea. The problem is, they do not seem to effectively hedge the way that many hope, and long-term performance studies have shown that heavy use of them tends to make a portfolio trail a benchmark. Additionally, the fees of alternatives tend to outweigh the benefits. University endowments have long been known to be heavy users of alternative investments.
FINSUM: There are a lot of new alternatives coming to the market in the form of mutual funds and ETFs, but they may not necessarily be a good idea.
The implications of the DOL’s application for an 18-month delay of the full implementation of the fiduciary rule continue to ripple through the wealth management market. The reality of the delay is that we may have a complete revision of the current rule, or major changes. Within that, experts agree it is very likely that the best interest contract will cease to exist. According to a professor focused on the space, “It's unclear whether you need the contract, if you're not going to have the class-action lawsuits." The right to class action lawsuits and the best interest contract were seen as the teeth of the fiduciary rule, the one-two punch that was to keep brokers in line.
FINSUM: What we think is really happening is the slow death of the rule. It has taken (and will continue to) a long time, but substantive changes have already been proposed and it looks like a lot more are on the way.
Most will know that the DOL has applied for a lengthy delay of the implementation of the full fiduciary rule. The existence of the delay was first known through disclosure in a court case against the DOL, but it was soon confirmed by the Office of Budget and Management on their website. Advocates of the rule have been outraged by the delay proposal, while opponents have embraced it. One of the key reasons why is that experts say the length of the delay is highly significant in that the DOL wants a great deal of time, which indicates that it may be seeking major changes. The length also seems to improve the chances that the DOL will work in tandem with the SEC to craft a new comprehensive package.
FINSUM: We think this delay is very promising as it shows that the new leadership of the DOL has a real commitment to improving this rule. The exact way they will do that is not clear, but we do believe major changes are on the way.
The industry, and especially advisors themselves, have been railing against the fiduciary rule for over a year now, but one inevitable reality is taking hold—the rule is good for owners. We say owners, not advisors, as compensation will not be helped by the rule, but overall profits will. Raymond James is a good example, as the company just reported record revenue and profit growth for the second quarter, all on the back of the changes being pushed by the fiduciary rule. Yet despite this, it also cut broker pay by 100 basis points. The firm says it is in a challenging period of restructuring operations and putting brokers through extensive training sessions.
FINSUM: The bottom line with this rule is that most advisors don’t like it, while firms love it. Revenues and profits will rise, boosting margins, but advisors will likely be left hanging.