High Fees Under Pressure

One of the biggest trends in the investing world is what some have called “Vanguarding” after the immense pressure that Vanguard is placing on its competitors in the asset management business. Similar to the effect that Google has had in my old business – online ads – or that Amazon is having on traditional retailers, Vanguard has been dominating the asset management space. And it’s been doing so largely by offering the lowest cost investment options available.

Every dollar saved via lower fees accrues and compounds to investors’ benefit over time. Investors are slowly awakening to this fact. Even typical mutual funds with operating expenses of around 1.00% are seen as expensive. Vanguard index funds typically cost 90% less. Schwab has also been offering similarly low cost ETFs.

Two stories from the past week illustrate the fee pressure on the industry. First Josh Brown covers the story of a mutual fund company being sued by its own employees because their funds used in their retirement plan are seen as outrageously high.

Since 2010, fiduciaries of the $600 million American Century Retirement Plan populated the plan’s investment menu solely with American Century funds, using a selection process “tainted by self-interest” rather than a prudent one that would have led fiduciaries to use less-expensive funds with similar or better performance, the complaint said.

As Brown says: “In other words, it’s fine for brokers across the country to sell these underperforming, overly expensive A-share vehicles to regular people – strangers – but not for us to own in our own retirement accounts.”

The second news item comes from Fidelity, the mutual fund pioneer that has long prospered by offering high cost, actively managed funds. Fidelity finally capitulated and has begun offering low cost index funds, while keeping their cash cow funds in place. Bloomberg:

“Still, it’s easy to see why Fidelity felt like it had to do something. Investors are increasingly demanding lower fees, which is somewhat problematic for a fund family like Fidelity that is widely associated with expensive, actively-managed funds. According to Fidelity, investors yanked close to $19 billion (net) last year from its actively-managed stock funds. At the same time, investors poured a record-breaking $236 billion into Vanguard, a bastion of low-cost, passively-managed funds.”

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