What You Need to Know
- A new State Street survey finds that a majority of investors are aware of fees but do not fully understand how they work.
- Investors also seem to have a limited understanding of what
- The impact of inflation and taxes are common concerns among investors across generations.
Investors continue to lack a general understanding of the management costs and advisory fees they pay, despite the financial industry’s efforts to make fees more transparent, State Street Global Advisors reported this week.
State Street’s Low-Cost Investing Survey found that confusion exists about how investors pay for both investment products and the guidance they receive from an advisor.
A vast majority of respondents said they are at least aware of what expense ratios and basis points are, but few said they understand them completely.
“Comprehension of investment product fees — and fees in general — is low even among those working with an advisor,” Brie Williams, head of practice management at State Street Global Advisors, said in a statement. “There’s a clear opportunity for advisors to talk to clients about what they own, why they own it and how much it costs.”
Consider that 47% of investors surveyed believe that the management costs of investments like mutual funds and ETFs are already included in the fee they pay their advisors or investment platform.
Sixty percent of investors currently working with an advisor agreed with this false statement, compared with 37% of self-directed investors. Younger investors were likelier than older ones to agree with it: 71% of millennials agree versus 51% in Generation X and 36% of baby boomers.
A lack of understanding also exists about the meaning of diversification. The survey found that 85% agreed that “a well-diversified portfolio is one with a variety of investments that reduce stock market risk,” but 55% incorrectly believed that “a well-diversified portfolio is having investments in a variety of accounts at different firms or investment platforms.”
State Street, in partnership with A2B Planning and its field partner Prodege, conducted the online survey in mid-June among a nationally representative sample of adults. For its custom “low cost” analysis, researchers analyzed 224 adults with investable assets of $250,000 or more.
How Low Is ‘Low Cost’?
State Street noted that the overall awareness of costs at the investment product level seems to be high, but understanding of what the specific costs actually are is low.