Earlier this week, Blackrock announced that it is dropping its expense ratio on 15 ETFs to 0.05% or less in most cases. Yesterday, Charles Schwab countered by lowering its fees in 5 of its ETFs. Also, happening this week was Merrill Lynch’s announcement that it will end commissions on trades in the retirement accounts and will instead require consumers to pay a fee as percentage of the assets. Why the shakeup in the traditional Wall Street retirement model and why the cuts in expense ratios? The reason is the upcoming regulatory rule set to take effect next year that will upend the industry as we know it.
Since the financial crisis, the Obama administration has been trying to put in place regulations that require investment advisors to put interests of their clients first and reduce risk in retirement portfolios. Isn’t this the way it should have been in the first place? Actually not, till now, all investment advisors had to do was determine the investments to be “suitable” for the clients. And “suitable” could mean any number of things which, in most cases, meant investments that added to the commissions for the advisors with little regard to the risk profile of the client. When the rule goes into effect next year, it is widely believed that low cost ETFs that mimic the overall market indices will be one of the most popular investment vehicles and hence the race to offer ETFs with the absolute lowest expense ratios.
For the fat cats i.e. investment advisors who charge 1.5% – 2.5% of assets under management and then recommend investment vehicle i.e. mutual fund or bond fund that has another 1% expense ratio and also gives them a nice commission, the end is near. No longer are clients going to be sitting around paying hefty fees to an advisor when they can simply invest in a low cost ETF and no longer are mutual funds going to enjoy inflows with an expense ratio much higher than a comparable ETF. In fact, the latest data from fund-industry group ICI show a net $119 billion was pulled out of U.S.-focused stock mutual funds year to date with most of the money going into ETFs. This, as the market has been hitting record highs.
Future Wealth’s View
Management fees, expense ratios and commissions eat up most of the upside for the average investor. Over a lifetime, these fees combined add up to a significant chunk of money (see our comparison chart on impact of fees at https://futurewealthllc.com/pricing/). From the outset, Future Wealth’s business model was to stay away from mutual funds and recommend a low cost, no commission buy and hold ETF strategy for our clients. Our promise has been and will be to charge a sum total of less than 1% ( Our fees + ETF expense ratio)* of assets for our clients.