Navigating Through a Low-Fee World

With fees becoming a major source of scrutiny across the financial services industry, many advisers are exploring alternative business models to stay competitive. Global research firm Cerulli Associates recommends constructing client portfolios with a focus on reducing overall costs through the right securities to survive a low-fee world.

“During the past several years, the magnitude of fees has become a challenge that directly affects the way in which financial advisers construct client portfolios,” says Tom O’Shea, associate director at Cerulli. “New regulations cast a spotlight on high-priced investment vehicles. Advisers building portfolios should explore ways to reduce fees by using institutionally priced mutual funds, low-cost model-delivered managed accounts, and ETFs [exchange-traded funds].”

The firm also points out that consumers are becoming increasingly focused on how much they pay in fees. With the expanding wealth of information available to them, consumers can be expected to demand even more transparency in the future.  

“Consumers have long been unaware of the level of fees and the type of fees they pay,” O’Shea explains. “About 45% of households believe the financial advice they receive is free, or they are unsure whether they pay for financial advice, but there are several forces driving consumers’ attentiveness to fees. Both the media and the emergence of digital advisers have shed light on the high cost of investing.”

Moreover, excessive fees have been the cornerstone of several recent Employee Retirement Income Security Act (ERISA) litigation cases, which experts expect defined contribution (DC) plans to see more of in the coming years.

Cerulli recommends analyzing alternative pricing models. It notes, “The use of low-cost investment vehicles such as I-Share mutual funds, ETFs and model-delivered managed accounts can only generate so much savings, particularly because managed account sponsors have placed downward pressure on managers for years. At some point, advisers need to scrutinize their own fees.”

These insights are from the February issue of The Cerulli Edge – U.S.Edition, which explores low-cost investments, goals-based planning and managed accounts as qualified default investment alternative (QDIA) vehicles.