Low cost has always been the story with exchange-traded funds, but that theme is spreading fast across the financial services industry, which should be a wake-up call for financial advisers.
That was the basic message Monday morning during a presentation at the Inside ETFs conference in Hollywood, Fla.
“Everything is driving toward zero,” said presenter Dave Nadig, chief investment officer at ETF Trends.
Referencing the sweeping brokerage-industry commission cuts announced last fall, Mr. Nadig pointed to the ironic reality that, “All the major brokerages are now paying money to advertise the fact they don’t charge you anything.”
“The race to zero is now standard and it’s hitting everything, and it doesn’t seem to be letting up,” he added.
Driving the point home that financial advisers are spending too much time on portfolio management, which has essentially become a low cost, commoditized part of the financial planning industry, co-presenter Matt Hougan, chairman of Inside ETFs, said advisers need to start finding new ways to add value.
“Hidden fees are the new black in investing,” he said. “When everything is free, you become the product.”
Cash management is one of the ways advisers can add value, even if it only results in saving clients a few basis points, Mr. Hougan said. “You need to pay attention to cash.”
To illustrate the evolution of the portfolio management business, Mr. Hougan presented a globally diversified portfolio of 4,500 stocks from 17 different countries that in 2010 cost just 14 basis points. Today, that same portfolio costs 3 bps.
“It’s a wrap,” he said. “Investing is solved. We’re done. Let’s move on.”
Part of his message was that the fee war, which has spread to everything from trading and custodial services to technology, has been fueled by the migration toward low-cost ETFs.
In detailing last year's $326 billion of net flows into ETFs and the contrasting $94 billion of net outflows from mutual funds, Mr. Nadig said while the numbers are extreme, it is a continuation of the same story from the past 10 years.
Over the past decade, as the ETF industry grew to $5 trillion from $1 trillion, it has attracted $2.6 trillion, while the mutual fund industry has lost $186 billion.
“As you think about what actually matters to your clients, ask yourself where maximizing portfolio returns fits in against things like career growth, travel, taxes, bill payment, retirement planning,” Mr. Hougan said. “Think about that and then reshape the priorities of how you’re spending your time. And if you’re changing what you’re talking about, it may be time to change the way you’re charging fees. The financial adviser fee model is changing — this is a real thing.”
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