At the end of June, there were $6.51 trillion in combined assets under management allocated to US-listed exchange traded funds and exchange traded products.
First-half inflows totaled $472.18 billion and with a few days left in the July, depending on the estimate, the annual inflows record is either broken or soon will be. Bottom line: Advisors and clients love ETFs and one of the reasons that's the case is lower costs relative to actively managed mutual funds.
In large part, low fees explain why Vanguard is the second-largest and still one of the fastest-growing ETF issuer and why Charles Schwab, despite a relatively late entry to ETFs, is the fifth-largest sponsor. Indeed, those are among the data points confirming clients love low fees, but that affinity may be waning.
Important Opportunity for Advisors
“Comprehension of investment product fees – and fees in general – is low even among those working with an advisor. This underscores how much work our industry has to do when it comes to price transparency and investor education,” said Brie Williams, Head of Practice Management at State Street Global Advisors. “There’s a clear opportunity for advisors to talk to clients about what they own, why they own it, and how much it costs.”
The SSGA survey notes that the line at which investors think an ETF ceases to be “cheap” is an annual fee of 0.61%, or $61 on a $10,000 investment. However, that's above the asset-weighted average expense ratio of U.S. open-end mutual funds and ETFs.
Advisors should look at the data point and see opportunity and that opportunity does exist. Of the 100 cheapest US-listed ETFs, none have expense ratios exceeding 0.06% and several are free.
“Furthermore, nearly half (47 percent) of investors believe the management costs of investments like mutual funds and ETFs are already included in the fee they pay their advisors or investment platform. Notably, investors currently working with an advisor (60 percent) are more likely to agree with this, versus 37 percent of self-directed investors,” adds SSGA.
Of added interest to advisors is the fact that younger demographics believe the falsity that fund fees are included in their advisory fees.
“The younger the investor, the more likely they are to agree with this false statement: 71 percent of Millennials agree versus 51 percent in Generation X and 36 percent of Boomers, who presumably have had more investment experience over their lifetime,” notes SSGA.
The good news here is that advisors can use this as an opportunity to help clients understand the differences between fund and advisory fees. It's a worthwhile conversation because it helps clients avoid long-term disappointment, better rationalize return expectations and avoid feeling duped.
Where Priorities Lie
As noted above, clients aren't focusing on fund fees the way they used. Many feeling as though 0.61% per year makes for a “cheap” ETF proves as much. In reality, low costs is usually 0.10% or less.
Still, advisors need to be in tune with what factors are important to clients.
“When asked to rank order factors in terms of importance when evaluating investments like mutual funds and ETFs, the majority of investors prioritize 'risk compared to return' (53 percent), 'quality of stocks in the fund' (51 percent), 'performance compared to peers' (46 percent) and 'performance compared to the benchmark(s)' (42 percent) over 'management cost of the fund' (35 percent),” said SSGA.
In what may be another surprise to advisors, clients aren't focusing on fund managers' track records or sector allocations in funds. Indeed, the SSGA survey contains plenty of surprises, but they should be taken for what they are: Opportunities to build better client relationships.
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