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FAs Warned: Pay Closer Attention to Fund Fees

July 19, 2017

Financial advisors may be attracted to sophisticated portfolio construction, but they shouldn’t overlook the one proven source of higher returns when it comes to funds — low fees, Scott MacKillop writes in MarketWatch.

Several studies have found correlation between low fees and fund performance, according to MacKillop, CEO of First Ascent Asset Management.

A 2010 Morningstar study found the lowest-cost quintile of mutual funds consistently outperformed the highest-cost quintile — across asset classes and during every time period studied, he writes.

And Vanguard concluded in 2015 that a mutual fund’s expense ratio is the best metric to distinguish between better-performing funds and poorly performing ones, according to MacKillop. That means there’s little value for investors to pay more for funds, he writes. Therefore, advisors need to pay attention to the details: the internal expenses of the funds and ETFs in the portfolios they build for their clients, and the trading and rebalancing costs associated with overseeing a portfolio, according to MacKillop.

In practice the choices advisors make for their clients can make a big difference for their retirement, he writes. For example, while balanced funds in Morningstar’s database have an average expense ratio of 0.87%, the same balanced portfolio could be crafted with ETFs whose internal expenses are just 0.1%, according to MacKillop. That’s a difference of 0.77%, he writes.

Scott MacKillop

And Morningstar estimates that 1% in additional fees can cut the value of an account by 28% over 35 years, according to MacKillop. So while it’s not imperative that financial advisors stick to low-cost ETFs and mutual funds, they do need to assess what the fees entail for their clients’ long-term financial planning, he writes.

By Alex Padalka
  • To read the MarketWatch article cited in this story, click here.