Poll of low-cost investors reveals misconceptions about advisor compensation, and what 'low cost' means to them
For the better part of a half-decade, Canada’s investment industry has been heavily preoccupied with ensuring that Canadian investors what fees they pay as they invest. And while surveys reveal Canadians still have to learn, a new survey suggests that their American counterparts have a big gap to fill.
In its recently released Low-Cost Investing Survey, which draws from a poll of 224 U.S. adults with at least US$250,000 in investable assets, State Street Global Advisors found that American investors still suffer from a general lack of understanding about the management costs and advisory fees they pay.
“Comprehension of investment product fees – and fees in general – is low even among those working with an advisor,” said Brie Williams, Head of Practice Management at State Street Global Advisors. “This underscores how much work our industry has to do when it comes to price transparency and investor education.”
While a vast majority of respondents said they’re at least aware of what expense ratios and basis points are, fewer than one third feel they understand each term “completely.”
Forty-seven per cent of investors surveyed incorrectly believe that the fee they pay their advisors or investment platform already include the management costs of investments like mutual funds and ETFs. Investors currently working with an advisor are more likely to hold that misconception than self-directed investors (60% vs. 37%). Younger generations were also more likely to have that mistaken belief; 71% of millennials agreed with the statement, vs. just 51% of Gen Xers and 36% of Boomers.
More than four fifths of investors said they’re at least aware of what expense ratios are (87%) and what basis points are (83%). Still, less than a third said they understand the terms “completely,” with advised investors being less likely (24%) than self-directed ones (34%) to say they completely understand.
When asked what they consider to be “low cost” when it comes to fund expenses, respondents who professed to understand expense ratios or basis points said 0.61% is the point where they stop considering something low-cost. Citing data from Morningstar, State Street said the asset-weighted average expense ratio of U.S. open-end mutual funds is 0.51%, and the average asset-weighted cost for ETFs is 0.20%.
“Cost differences vary drastically across mutual funds and ETFs,” Williams said. “From an ETF provider’s perspective, low cost is generally considered funds with an expense ratio of 0.10% or less – this is 6x lower than the threshold of investors in the survey.”
The survey also found that many respondents were woefully misguided on what “diversification” means.
Even though 85% agreed a well-diversified portfolio holds a variety of investments that reduce stock market risk, 55% thought that meant “having investments in a variety of accounts across different firms or investment platforms.”
