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Critics can criticize passive investing all they want, but one of the clear benefits of the evolution of index funds and exchange traded funds is that advisors and clients alike are more fee-conscious.
As they should be. The longer a client holds onto a fee-levying fund, regardless of structure, the more the client loses in expenses. That is to say the lower a fund’s fee is, the better for the client. That ethos helped make Vanguard one of the world’s largest asset managers. Ask any advisor, or client for that matter, about the fund issuer they view as most synonymous with low fees and there’s an excellent chance the answer will be Vanguard.
However, Vanguard doesn’t have a monopoly on low funds fees. Likewise, not all clients are aware of what’s a good deal when it comes to expense ratios and what’s not. Not all investors are in tune with the importance of fund fees. Some may think 1% a year is a good deal. Of course, that's where advisors come in and there's compelling math which to educate novice clients on the importance of lower fund expenses.
That means advisors have opportunity to educate clients on a topic that should be near and dear to their hearts and one that they’ll likely appreciate right off the bat.
Fund Fees’ Impact on Total Returns
The asset-weighted average fee on a Vanguard fund is 0.08% -- well below the industry average of 0.47% at the end of 2022. Obviously, that difference is meaningful, but the fund issuer illustrates just how meaningful. The firm notes that a client that starts with an initial investment of $250,000 will pay $179,212 in fund fees over 30 years if the expense ratio is 0.47%. If the fund charges just 0.08% per, the client pays $32,127 over those three decades. The example assumes 6% average annual returns.
That’s more than $147,000 saved – a massive amount and one that can make material differences when it comes to important events such as retirement and needs like long-term care.
“Clients don't get a bill explaining how much they’ve paid in fund expenses since those costs are paid directly out of each fund's returns,” notes Vanguard.
Translation: Many clients may not be diligent in terms of monitoring fund fees. Some are apt to think that’s why they hire advisors. Point is some clients need to be shown the value of low fund fees and it’s on advisors to provide those illustrations.
Important Fund Fee Considerations
Another important point advisors should highlight in client conversations is that low fees are not a guarantee of success, but they do put the odds in clients’ favor. That said, the fund industry is littered with examples of higher fee products outperforming their cheaper rivals by margins large enough to render the fee difference moot.
On the other hand, advisors should be judicious when it comes to how issuers approach fee reductions. Some deploy the strategy once in a blue moon. Others do it regularly. In that comparison, it’s easy to see which one has clients’ best interest mind.