Broker Check

What’s Getting Lost in the Race to the Bottom for Passive Investment Fees? A Desire for Advice

| April 24, 2017

Cost reductions for various kinds of passive investment vehicles keep making headlines. Take the case of Charles Schwab which recently introduced target-date funds for retirement plans with expenses below .10 percent. An article on THINKADAVISOR.COM theorized the move could give the firm a competitive advantage until other rivals that have also made inroads with passive investments decide to lower their fees as well. That is just what happened. BLACKROCK and FIDELITYfollowed up with fee reductions for some of their ETF’s in what Bloomberg has called a “Price War.”

If you think this trend represents trouble for actively managed investments, first consider the results of a JUNE 2016 SURVEY BY AMG FUNDS. The survey found 78 percent of millennials believe active management provides incremental value and that 94 percent own actively managed funds, perhaps indicating they plan to maintain or increase their allocations.

Wanted: Advice on Handling Money

Perhaps even more significantly, the survey had good news for financial advisors who keep the best interests of clients in mind. Investors, particularly well-to-do younger ones, want advice on how to manage their investments.

“Millennials also recognize the value added by financial advisors in offering investment oversight. Sixty percent of millennials said they are willing to pay more for this oversight, while 90 percent of advised millennials said that they rely most on financial advisors for portfolio diversification”, the article in World Market Intelligence reported.

Other surveys confirm that large percentages of consumers in their early through prime earning years want help managing their money. Lightspeed GMI/Mintel Group Ltd. found in March 2016 that between 45 and 65 percent of consumers aged 18-44 wished financial companies would advise them on how to handle their money. A key take-away for Mintel was that many “companies already focus on streamlining financial services for speed. However, they could also focus on the entire user experience by helping customers make smarter decisions with their money in general.”

The Benefits of Building Trust
This is very welcome information for financial advisors, particularly those with independent practices built on experience and the capacity to deliver exactly the investment assistance their customers need. It represents an opportunity to build trust and form long relationships with new customers who really desire what you offer. That way the next time market turbulence arrives, you will be there to guide them against a tendency, reflected by 30 percent of millennials in the AMG survey, to reduce equity exposure or exit the market entirely in case of a 20 percent drawdown. Absent help following the market of 2008-2009, many no doubt exited the market in whole or in part, and missed the intervening years of upside.

The race to the bottom on passive investment fees is certainly a reality. But the desire for low cost is not the only motivator at work in the minds of the investing public. They also need the help of experienced professionals. And independent financial advisors may be situated better than anyone in the industry to satisfy this demand. If you have been considering a move to your own independent practice, this is just one more positive reason to act. Cutter & Company, an independent Broker-dealer and Registered Investment advisor, has more information for independent financial advisors at