Financial planner Michael Kitces tweeted about fellow planner James Watkins’ blog post in which Watkins discusses fees and the fiduciary standard.
Financial planner Michael Kitces tweeted about fellow planner James Watkins’ blog post in which Watkins discusses fees and the fiduciary standard.
Without getting too deep into the financial minutiae, Watkins discussed how Vanguard’s fees have become the legal norm when it comes to comparing the excessive fees of other fund companies.
Don’t believe it?
Watkins references a specific case against Citigroup and its 401(k) plan. In it the plaintiffs allege that the Citigroup 401(k) Investment Plan Committee chose mutual funds for the plan that were affiliated with Citigroup and whose fees were 200% more expensive than similar Vanguard funds, despite the fact the Vanguard funds outperformed those affiliated with Citigroup.
In other words, the committee acted in the best interests of the bank and not the plan participants.
The United States District Court for the Southern District of New York, which is hearing the case, held that Vanguard’s funds can be used on a comparative basis to determine the appropriateness, or conversely the excessiveness, of fees charged plan participants.
Furthermore, because plan participants bear the risk of 401(k)s, there is a fiduciary duty for advisors to consider fees when recommending specific products to their 401(k) clients.
Watkins goes on to discuss his own views on the value of active management including introducing his proprietary concept of “Active Management Value Ratio” or AMVR for short, which is a mathematical formula he’s created to evaluate the cost effectiveness of actively managed mutual funds.
So, what does it all mean?
Well, for one, fees matter – and that’s only going to become more important as we get closer to CRM2’s final implementation. Secondly, and equally important, is the idea that advisors can’t ignore fees when making fund recommendations to clients because whether they like it or not, the courts (albeit in the U.S.) are coming down hard on firms that choose to ignore their fiduciary duty.
The big winner in all of this? Unquestionably, Vanguard.
Without getting too deep into the financial minutiae, Watkins discussed how Vanguard’s fees have become the legal norm when it comes to comparing the excessive fees of other fund companies.
Don’t believe it?
Watkins references a specific case against Citigroup and its 401(k) plan. In it the plaintiffs allege that the Citigroup 401(k) Investment Plan Committee chose mutual funds for the plan that were affiliated with Citigroup and whose fees were 200% more expensive than similar Vanguard funds, despite the fact the Vanguard funds outperformed those affiliated with Citigroup.
In other words, the committee acted in the best interests of the bank and not the plan participants.
The United States District Court for the Southern District of New York, which is hearing the case, held that Vanguard’s funds can be used on a comparative basis to determine the appropriateness, or conversely the excessiveness, of fees charged plan participants.
Furthermore, because plan participants bear the risk of 401(k)s, there is a fiduciary duty for advisors to consider fees when recommending specific products to their 401(k) clients.
Watkins goes on to discuss his own views on the value of active management including introducing his proprietary concept of “Active Management Value Ratio” or AMVR for short, which is a mathematical formula he’s created to evaluate the cost effectiveness of actively managed mutual funds.
So, what does it all mean?
Well, for one, fees matter – and that’s only going to become more important as we get closer to CRM2’s final implementation. Secondly, and equally important, is the idea that advisors can’t ignore fees when making fund recommendations to clients because whether they like it or not, the courts (albeit in the U.S.) are coming down hard on firms that choose to ignore their fiduciary duty.
The big winner in all of this? Unquestionably, Vanguard.
