Trader Talk

New Dept. of Labor rules may spur more low-cost investments

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The Department of Labor has finally released its rules on financial advisers, introducing — in most cases — a higher "fiduciary" standard that requires brokers to act in the best interest of their clients, which may include providing lower cost alternative investments where appropriate.

Those of us who for years have been urging American investors to invest in lower-cost products like ETFs can only hope that this will be a wake-up call to those investors.

The new rules will only apply to retirement accounts, but I expect those retirement accounts to slowly —reluctantly — begin to offer lower priced funds, including lower-priced actively managed funds, as well as offering a sprinkling of ETF products.

And I hope that investors will start making more low-cost investment choices.

Todd Rosenbluth, who heads up ETF and mutual fund research at S&P Capital IQ, quantified just how much investors are paying for advice. He notes that the average net expense ratio for roughly 830 large-cap core mutual funds — which are primarily actively managed — is 1.1 percent.

Contrast that with the Vanguard 500 Index Fund, which has an 0.05 percent expense ratio. Or the SPDR S&P 500, the biggest ETF in the world, with an expense ratio of 0.09 percent.

That's a big difference — 1.1 percent vs. 0.09 percent for the SPY!

That means the annual fee for a $100,000 investment in a typical large-cap fund is $1,100. For the SPY, it's $90. You're paying $1,010 more!

Do you get better performance? No. He noted that during the five-year period ended April 5, the large-cap group had an average annualized total return of 9.4 percent. The passively managed Vanguard 500 Index Fund had a return of 11.3 percent.

Rosenbluth also notes that 225 of those big-cap funds — almost a quarter of the large-cap universe — have an expense ratio higher than 1.35 percent.

Really expensive!

Rosenbluth's conclusion: "High-cost mutual funds with poor performance records will be harder for a financial adviser to justify."