When Should You Hire a Financial Adviser?
In the latest episode of Adviser Investments’ The Adviser You Can Talk To podcast, Director of Research Jeff DeMaso sits down with Senior Account Manager Claudine Schrock to discuss some of the reasons do-it-yourselfers turn to professionals to manage their portfolios.
Periods of market volatility can be emotionally overwhelming for many investors, which often leads to costly decisions. Click here to listen to Jeff and Claudine’s conversation and learn from these seasoned pros!
Vanguard Running Out of Fee-Cutting Room
When you make your business on cutting expenses, eventually something’s got to give. During Vanguard’s ongoing quest to provide investors with the lowest costs in the fund game, industry competitors have had to keep pace to attract and retain assets.
These “fee wars,” which we’ve covered extensively, have been a boon for investors who get to keep more of their investment gains. As the logical terminus of fee wars—0.00% expense ratios—approaches, fund giants have to claim each fraction of a percentage point as a sales pitch. But while there are vast economies of scale that allow providers to take ever-narrower cuts, funds do cost money and resources to run, and eventually, Vanguard and its ilk were going to run out of room to chip away at fees any further.
That time may be at hand. Vanguard, which has led the industry in cutting expense ratios, is quickly—and quietly—reaching its nadir.
As a refresher, an expense ratio tells shareholders how much they are paying to support the firm’s annual cost of operating a particular fund or ETF. It is calculated by dividing annual operating expenses by the average dollar value of the fund’s or ETF’s assets under management.
So why do we say Vanguard may be hitting the end of the road? Let’s check the numbers. In 2016, fully 170 Vanguard funds—if you break out its Investor, Admiral and ETF share classes—saw their expense ratios cut from the prior year. But last year, that number dropped to 62, or little more than one-third as many.
Source: The Independent Adviser for Vanguard Investors. Note: Data excludes institutional shares and variable annuities.
The table above also makes plainly clear that cost-cutting among Vanguard ETFs slowed dramatically, with just nine ETFs having their expenses reduced in 2017 compared to 42 in the previous year.
On the other side of the ledger, it’s Vanguard’s smallest investors who are bearing the brunt of rising expense ratios, though the across-the-board magnitude of the increases was reduced in 2017; the average increase of 0.025% last year was about one-third less than the average 0.038% increase in 2016.
The biggest operating expense increases have mostly shown up in Vanguard’s money market funds, where the abandonment of fee waivers has sent operating expense ratios higher. Take Vanguard California Municipal Money Market fund, for example, where costs to investors have risen from 0.06% to 0.16% over the past two years.
Vanguard’s pioneering low-cost approach has saved investors a giant bundle of money over the years. But is it still the champion cost-cutter? Not at all, and that’s why they’ve stopped emphasizing the clipping of a percentage point or two, because they’re doing less and less of it and the benefits are smaller and smaller.
The issue facing Vanguard now is that some of its competitors still have room to cut fees and make hay about it, while others have deeper pockets, allowing them to undercut even Vanguard’s very low expenses.
Will the Vanguard empire be able to strike back? We’ll see. What we do know is that cutting the cost to invest is a great benefit for shareholders, so we’re pleased to see that more fund companies have made it their mission to do so. Stay tuned for Fee Wars 2.0!
Fiduciary Rule in Jeopardy?
Should the government play an enforcement role that requires financial professionals to put their clients’ best financial interests ahead of their own? That debate is still being played out, and was back in the news last week when a federal appeals court ruled that the Department of Labor (DOL) overstepped its bounds by implementing the so-called “Fiduciary Rule” that went into partial effect in June 2017.
As we discussed last year, the rule requires financial advisers to act in the best interests of their clients who are investing for retirement, and applies to all financial products that can be used in a tax-advantaged retirement account—IRAs, 401(k)s and some 403(b)s. It seeks to protect retirement savers from unscrupulous investment professionals more concerned with their own financial gains than those of their clients. Advisers are prohibited from making misleading statements about investment transactions, their compensation or any conflicts of interest.
(At Adviser Investments, we’re way ahead of the curve on this rule. Since we first opened our doors in 1994, we’ve been a fee-only investment adviser. We don’t take money from fund or insurance companies or anyone else to sell their products. We only get paid by our clients.)
Shortly after taking office, President Trump issued a memorandum asking the DOL to delay implementation of the fiduciary rule to better analyze its potential impact on retirement investors and businesses. While the law went into partial effect in June 2017, its full implementation was pushed back to July 2019. And now its very existence may be at stake.
On March 15, in a 2–1 opinion that vacated the fiduciary rule, a panel of the United States Court of Appeals for the Fifth Circuit held that legislation involving retirement accounts had to be made by Congress or other federal or state regulators. The panel’s majority opinion stated that “A perceived ‘need’ does not empower [the DOL] to craft de facto statutory amendments or to act beyond its expressly defined authority.”
Under its mandate to look out for the American worker, the DOL claims oversight over retirement accounts, which receive special protection under federal retirement and employee benefits law. But opponents of the rule say it is overly burdensome, holds financial professionals to an excessively high legal standard and that the Securities and Exchange Commission (SEC), not the DOL, is better equipped to take the lead on creating a “best-interest” standard of care. Advocates for the DOL’s fiduciary rule believe the SEC is unlikely to draft a rule as favorable to retirement investors.
So where does this leave the fiduciary rule? It’s unclear. The court’s decision does not put an end to the fiduciary rule, and the Labor Department has the option to appeal. Given an existing decision in a separate court, the Supreme Court may eventually have to step in. And if there is no appeal of the Court of Appeal’s for the Fifth Circuit’s panel’s decision, the rule will be eradicated, perhaps as early as May.
We’ll be watching for future developments, but in the meantime, while the fiduciary rule remains on the books, it’s important to understand what it doesn’t cover. Many accounts, such as 403(b) accounts for government employees like teachers and plans affiliated with churches, are not covered. Likewise, investors in non-retirement accounts, such as regular brokerage accounts, are not guaranteed that their investment professionals are following the fiduciary standard. Same goes for tax-advantaged accounts like 529 plans; as education accounts, not retirement plans, they aren’t covered under DOL rules.
At Adviser Investments, fiduciary duty is the foundation of everything we do in our partnerships with our clients. We firmly believe that investors are best served working with a trusted, professional financial adviser who has the experience to help them grow and protect their wealth over time. As mentioned above, we are completely independent of Vanguard, Fidelity and all of the other fund companies we invest with. Our first and only loyalty is to our clients.
We’re always happy to see increased investor protection, and glad that, for now, the fiduciary rule will hold the rest of the industry to the same standard we’ve always set for ourselves. If it does eventually get defeated, we think it will become even more imperative for investors to stay informed about how their advisers or brokers are compensated and what outside factors might be influencing their advice. If you’d like to review some questions you can ask your adviser to confirm they are acting in your best interests, please click here to download our free special report on the subject. (And check out the podcast at the top of this issue if you’re considering partnership with an adviser.)
If the DOL prevails in the courts and the fiduciary rule stands, we think it’s all the better for the industry and individual investors. But if we were choosing between an adviser who is being forced by law to work in our best interests and one who has believed in the principle for decades, we know which one we’d trust our retirement savings to.
If you’d like to learn how Adviser Investments could work in your best interests, please call us at 1-800-492-6868 or email us at firstname.lastname@example.org.