The low-fee wars have no end in sight

Justin Ho Oct 11, 2018
George Marks/Retrofile/Getty Images

The low-fee wars have no end in sight

Justin Ho Oct 11, 2018
George Marks/Retrofile/Getty Images

Roughly one in three people in the United States have less than $5,000 in retirement savings. It doesn’t help that wages haven’t been getting much better. But for those lucky enough to have some money stashed away, the cost of investing has been getting lower and lower.

Management fees for mutual funds have dropped to fractions of a percent over the last decade. And recently, the financial services giant Fidelity launched some new mutual funds with no fees, and the company says investors have poured more than a billion dollars into them ever since.

Evan List is one of those investors. He’s 42, a cloud engineer in Ohio and began saving for retirement in his mid-20s. But when he started investing, he didn’t pay close attention to what he was invested in. He let his broker take care of that.

“As I’ve gotten older, of course, that’s retirement staring down on all of us, and I pay more attention to it,” List said.

He asked his broker for 10 years of statements, and realized his broker’s investments were charging him higher fees than he needed to pay. So he moved his money to funds with much lower fees. He and his broker went their separate ways.

“There’s certainly anxiety because you’re going out on your own,” List said. “I’d trusted this adviser for literally decades.”

List is part of a wave of investors that have poured money into cheaper funds over the last decade. And investment companies like Vanguard and Charles Schwab, which underwrites this program, have been scrambling to undercut each other.

Yale finance professor James Choi said there’s a question of whether funds will start offering negative fee funds in the future — where the funds pay investors to invest in them.

How can a big investment company charge microscopic fees? One reason: The funds are pretty easy to run. They’re called index funds, which simply mimic the likes of the S&P 500.

And Choi said when fees are already so low, it wasn’t a big deal for Fidelity to finally offer free funds.

“Given that market forces have pushed these fees down to something very close to zero, going all the way to zero may not have been that big of a sacrifice,” Choi said.

It’s not as if big investment firms are going all the way to zero to make you smile. Choi said remember, companies like Fidelity sell a lot of other stuff, too.

It’s what’s known as a loss leader strategy, said Kathleen Smith, a principal at Renaissance Capital.

“It’s like going to the supermarket, and they have chicken on sale, and they’re selling at a much lower price than their cost,” she said. Except that cheap chicken is next to other things you might want to buy for your cookout, like delicious spices and some charcoal briquettes.

If Fidelity’s the supermarket, Smith’s company is the free-range butcher next door. It sells specialty funds, made up of newly public companies. Smith said smaller firms like hers have to get artisanal.

“If you’re not one of the large players, you better be offering some niche products,” she said.

Her products carry higher fees than the average cheap index fund, but Smith said Renaissance Capital tried to keep them as low as possible.

“There’s going to be a never-ending lineup of new funds that are gonna get thrown against the wall, and these fund companies will hope something sticks,” said Ben Carlson, an investment adviser at Ritholtz Wealth Management.

There are signs the demand for cheap, simple funds might be cooling a bit. Data from Morningstar show that investors poured $281.7 billion into cheap, passive funds so far this year. That’s down from $571.2 billion during the same quarter last year.

Still, the sheer number of options out there has turned the fund market into a Costco for investing. But are the stacks of low-fee funds really all that different from each other?

“Once you get into a low cost index fund, and it’s not at some other place that’s charging you an arm and a leg, I think you’ve already kind of won in a lot of ways, in terms of fees,” Carlson said.

Carlson said things have never been better for investors as they are right now — as long as those low fees don’t tempt them into making bad trades.

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