A great article from Barron’s (2800+ words) describing the shifts in the investment environment, covering critical topics that all investors should be aware of, including the shift from active to passive, importance of fees, new regs regarding retirement advising and the importance of technology.

On active vs. passive management:

SPLITTING THE FUND INDUSTRY into active versus passive camps when assessing winners and losers is in vogue. It’s certainly worth noting that Pimco and Franklin have mostly active funds, while Vanguard and BlackRock are best known for their low-cost index funds and ETFs. In the past 12 months, investors have pulled $308 billion out of actively managed mutual funds and poured $375 billion into passive mutual funds and ETFs.

Importance of fees:

“This is something we’ve been talking about for 42 years,” says Vanguard CEO William McNabb. “But when you’re in the 1990s and you’re averaging 15% in equities, people just weren’t that interested in hearing the story.” More investors have bought into Vanguard’s vision now that a balanced portfolio is likely to return 5% a year over the coming decade, McNabb says. “If you’re paying 1% for that, you’re paying 20% of your return,” he notes. “Cost becomes so much more important in that kind of environment.”

Opaqueness of fund costs:

Right now, what you pay for a mutual fund often depends on how—and through whom—you purchase the fund. The rampant use of share classes means that the same fund can have vastly different costs—and vastly different performance as a result. Fund companies strike different deals with different distributors— Charles Schwab (SCHW) versus Merrill Lynch, for instance—and the costs that fund companies would incur to be sold via a particular platform instead get passed on to investors.

New fiduciary standards:

In April, the Labor Department issued a rule that will require advisors to act as fiduciaries when choosing funds for retirement accounts. That means they must put their clients’ best interests first. Again, that’s something that seems as if it ought to be obvious, yet very often was not. A fund’s load, as well as a portion of its higher fees in some share classes, is intended to compensate advisors. But commission-laden funds can put an advisor’s interests at odds with the clients’ interests—simply, good returns.

On how robo-advising is link online bank accounts:

Scott Burns, Morningstar’s global head of asset-management solutions, likens the robo movement to the 1990s advent of online banking. “Online banking didn’t rise up and put Wells Fargo and Chase out of business,” Burns says. “The banks built their own. Online banking was great for the customer. And it was great for the bank because it was superscalable and really lowered their cost.”

So who suffered? “It was bad for the bank teller,” he says. In today’s robo world, the bank teller is the advisor. But, Burns notes, in this case the advisors are the ones turning clients away. Established players like Vanguard, BlackRock, Fidelity, and Schwab are happily picking them up with their own low-cost services.

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Be sure to check out the NGPF Activity on Building an Investing Portfolio

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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