How to Make It in a Low-Fee World: Cerulli

Low interest rates and muted expected returns from equity markets are exposing the high cost of owning an investment portfolio, which can total more than 2% per year in fees to advisors and product manufacturers, according to a new report from Cerulli Associates.

“During the past several years, the magnitude of fees has become a challenge that directly affects the way in which financial advisors construct client portfolios,” Cerulli associate director Tom O’Shea said in a statement.

Long unaware of the level of fees and the type of fees they pay, consumers are increasingly waking up to these fees, and new regulations have spotlighted high-priced investment vehicles.

“In this environment, advisors must be sensitive to net-of-fee performance, and they must consider fees as one of the most important factors in constructing portfolios,” O’Shea said.

The February Cerulli Edge report says advisors are exploring ways to use low-cost investment vehicles when constructing client portfolios.

Asset managers surveyed by Cerulli said they expected I-share mutual funds, which are sold to institutional investors and often have no load and a low fee structure, to increase by 64%; R-share funds, created for retirement plans, to rise by 54% in 2017; and A-share funds, which commonly have a loaded fee structure, to decline by 66%.

The report says that the need to reduce portfolio costs is one factor driving adoption of exchange-traded funds and index funds. Low fees relative to other products and marketing support from ETF providers are the most important reasons advisors adopt these vehicles.

Sixty-six percent of sponsors rated fees as “very influential” in an advisor’s decision to use ETFs instead of mutual funds.

The next wave of innovation within the target-date industry may bring it closer to a managed account service, one of the three possible qualified default investment alternatives named by the Department of Labor in 2007, according to Cerulli.