The recent uproar over high fees is not a mere fad. I think it’s here to stay and I think it’s going to get much worse for high fee financial firms who don’t adapt. The problem is multi-faceted, but there are two huge headwinds coming for the high fee financial firms:
- Technological innovations
- A world of low returns
The first one is in our face every day. You not only have enormous tech efficiencies in the way traditional advisors operate and the way markets operate, which reduces costs across the board, but you also have the robo-advisors and more automated services coming online which are driving costs down across the board. This means that almost anyone can get reasonably good financial advice for 0.5% or lower. And that figure could be on the high side as the years go by.
Further, we’re entering a world of low returns. The share of outstanding public stocks has been reduced substantially relative to bonds over the last 30 years as interest rates have declined and it’s become more cost effective for firms to finance themselves via debt issuance. And at the same time interest rates have been driven to zero by zero interest rate policy and weak economic conditions. This combination means that the future returns on asset classes are likely to look nothing like they have in the past – particularly for the slice of asset holders who don’t own that reduced slice of the equity pie. This means returns are likely to be lower which means that asset managers are going to be competing in an environment that is increasingly competitive for a reduced amount of return. And as more and more investors realize that the high fee managers are cutting further into their returns than they did in the past they are likely to look for lower cost alternatives.
The uproar over 2 & 20 is just getting started. Next we’ll hear about 1 & 15 and then 1 & 10 and eventually we’ll start hearing about hedge funds whose fee structures resemble traditional mutual funds (many of which are already on their death beds). But the bottom line is, this isn’t the end of the decline in overall fees. And that’s a great thing for investors.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.