Following the market crash of 2008, the disappointing performance of active managers and hedge funds during the crisis, and the emergence of low-cost, tech-driven investing platforms, fees have played an increasingly important role in investment management. Passive funds have seen inflows soar, and this, coupled with increased regulation and the persistent low interest rate environment have combined to put pressure on advisors to provide lower fee offerings to clients.
At the same time, the Department of Labor fiduciary rule, though delayed, has shined a not-always-flattering spotlight on how some advisors are compensated. Industry competition has major players in what feels like a race to zero: In late February, Vanguard, Fidelity and Charles Schwab announced they were dropping fees on indexed ETFs within days, even hours, of each other.
When you’ve been in the business awhile, these types of pendulum swings from one investing environment to the next are all but expected. But they can be especially challenging for investors, who tend to be more easily swayed.
We’ve always believed that a strong focus on fees and transparency is important — before the 2008 crash, too many investors overpaid for investment management that did too little to protect them from the market downturn. But in our view, fixation on fees presents the danger of obscuring some real portfolio risks and may prevent an advisor from helping clients achieve their shared investment objectives.
What Your Peers Are Reading
Most investors claim to recognize the value of advice — more than two-thirds according to Natixis’ 2016 global survey of investors — and realize that an advisor is much more than a stock picker. And yet that seems to directly contrast with the move to a no-fee or low-fee environment. We think investors may have internalized a false dichotomy: High fees or low fees are the only two choices and low is better. Or, put another way: active or passive, and passive is preferred.
In our view, the premise that passive and active are mutually exclusive is false. The two strategies can and should peacefully coexist in a well-built portfolio constructed with the investor’s objective in mind.