Tahoe Market Pulse: Investor fees continue to fall
August 10, 2016
Remember that sit-in last month by congressional Democrats demanding action on gun control? Little noted was that it was interrupted by a need to vote on a halt to the Labor Department's fiduciary rule, one that requires financial advisers to (gasp!) act in the best interest of their clients with retirement accounts.
Democrats supported the rule saying it would lower costs; Republicans opposed it because the rule would make advice too expensive or unavailable and increase liability risks.
The president vetoed a bill scrapping the rule, but the party-line vote to override failed. The new rules will be implemented next April and impact the $19 billion wealth management industry. Bottom line: there will be fewer high-commission products available.
Independent registered investment advisers like myself are already held to a fiduciary standard for both retirement and non-retirement accounts. I happy to see fewer commission products. I don't recommend any.
Advisory fees have been coming down for decades and the new rules will reduce them a bit more. For years investors have been shunning front-loaded and managed funds and moving into indexed ETFs. No wonder. The average annual fee for an ETF is 0.27 percent, one-third that of managed funds many of which have annual expenses greater than 1 percent.
Investors can pay even less. The expense ratio for the Schwab U.S. Broad Market ETF (SCHB) is 0.03% and the Vanguard Total Stock Market ETF (VTI) is 0.05%. Investors can hold a broad equity portfolio for nearly no charge.
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Cheaper still is to own individual equities. Once you pay the commission to buy a stock (which should cost less than $10) there is no charge to own it. I've written about the stocks I like, such as Pfizer (PFE) from my May 19 article favoring healthcare stocks.
I also still hold General Electric (GE), Spectra Energy (SE), and AT&T (T). I like individual preferred issues as well (see last week's article).
Years ago computers cost thousands of dollars, long-distance phone calls and faxes (remember them?) were billed by the minute and the commission to buy individual stocks depended on their price and the number of shares.
Commissions often ran to hundreds of dollars. Stocks were priced in dollars and fractions not, pennies as today. Bid-asked spreads are much narrower now, another savings. Times have changed in ways that benefit investors.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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