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At the Money: Why Fees Really Matter · Masters in Business

• 0:11
  Speaker 1: You know what I say, where they are fun fees
• 0:22
  Speaker 1: going to zero? The trend for ETF prices has been
• 0:25
  Speaker 1: lower fees. Now, after a decade of falling prices, those
• 0:30
  Speaker 1: fees are approaching zero. Let's bring in an expert to
• 0:34
  Speaker 1: help us unpack this. Eric Balchunis's senior ETF analyst at
• 0:38
  Speaker 1: Bloomberg Intelligence who writes about funds and ETFs for years. Eric,
• 0:43
  Speaker 1: what's going on here with fees? Are they going to zero? Well?
• 0:48
  Speaker 2: They have been for a while. There's already a couple
• 0:50
  Speaker 2: zero fee ETFs out there. They are from companies that
• 0:54
  Speaker 2: aren't as popular as a Schwab or a State Street.
• 0:57
  Speaker 2: So I think once you get below five basis points,
• 1:00
  Speaker 2: you get to this realm of like super dirt cheap
• 1:03
  Speaker 2: where people don't really care are you three or four?
• 1:06
  Speaker 2: Are you two or three? You know, it's all almost
• 1:09
  Speaker 2: free basically.
• 1:10
  Speaker 1: And for people who don't talk in basis points, one
• 1:14
  Speaker 1: percent is one hundred basis points, so we're talking about
• 1:17
  Speaker 1: three basis points is three percent of one percent.
• 1:21
  Speaker 2: Yeah, So if you put ten thousand dollars into the
• 1:24
  Speaker 2: three basis point ETF, it'll be three bucks a year.
• 1:27
  Speaker 2: That's crazy, It is crazy. It's a beautiful thing.
• 1:29
  Speaker 1: Free.
• 1:30
  Speaker 2: Yeah, it is. I call it the great cost migration.
• 1:33
  Speaker 2: I call it the fee wars. This is why I
• 1:35
  Speaker 2: call the ETF industry the terrodome, because it is brutal.
• 1:38
  Speaker 2: If you're an issuer. Everybody's cutting fees all the time.
• 1:41
  Speaker 2: But the thing is it works. Cutting fees almost is
• 1:44
  Speaker 2: like batting a thousand. If you do that, the flows
• 1:47
  Speaker 2: will come.
• 1:47
  Speaker 1: So let's put a little history in place. Back in
• 1:50
  Speaker 1: twenty sixteen, you wrote a column titled the Vanguard Effect,
• 1:54
  Speaker 1: and the takeaway was the fee pressure the Vanguard group
• 1:58
  Speaker 1: was putting on Wall Street was saving investors a trillion dollars. Explain.
• 2:03
  Speaker 2: Yeah, So if you say all the money that went
• 2:06
  Speaker 2: to Vanguard, if it were if Vanguard didn't exist, right,
• 2:11
  Speaker 2: a lot of that money is going to be in
• 2:12
  Speaker 2: mutual funds which have an asset weighted average fee of
• 2:14
  Speaker 2: about sixty five basis points on an average fee, they're
• 2:17
  Speaker 2: over one percent. But I like to asset weight it
• 2:19
  Speaker 2: to be fair. That just basically says where are most
• 2:21
  Speaker 2: of the assets? So sixty six. So if that money
• 2:24
  Speaker 2: were in a average Vanguard fund that charges Vanguard's asset
• 2:28
  Speaker 2: weighted averages nine basis points. So that's a huge saving.
• 2:31
  Speaker 2: So that money moving over there, if it weren't in Vanguard,
• 2:34
  Speaker 2: we'll be paying sixty six instead of nine. Then Vanguard
• 2:37
  Speaker 2: only has half of the passive assets. The other half
• 2:40
  Speaker 2: are people who copy them, so Lack Rocky, State Street, Schwab,
• 2:44
  Speaker 2: even JP, Morgan and Goldman now have Vanguard ESK Infidelity.
• 2:47
  Speaker 2: That was the ultimate sort of surrender because Fidelity has
• 2:50
  Speaker 2: been the active manager. But Fidelity has cheaper index funds
• 2:52
  Speaker 2: than Vanguard now and they advertise it. So it's amazing.
• 2:55
  Speaker 2: So half of the other half I kind of credit
• 2:57
  Speaker 2: to Bogel or Vanguard. So if you add all that up,
• 3:00
  Speaker 2: you're looking at a trillion dollars total. But that number
• 3:02
  Speaker 2: grows by about one hundred and fifty billion a year,
• 3:04
  Speaker 2: and that number grows every year. So in the course
• 3:07
  Speaker 2: of the next decade or two, we're gonna look at
• 3:09
  Speaker 2: four or five trillion in savings just from what Bogul
• 3:11
  Speaker 2: and Vanguard did.
• 3:12
  Speaker 1: That's unbelievable. And let's flesh this out. When Vanguard launched
• 3:16
  Speaker 1: in nineteen seventy four, mutual fund fees were what two
• 3:20
  Speaker 1: percent one point eighty six some crazy number like that.
• 3:23
  Speaker 1: Imagine that was it. There was hardly any competition. The
• 3:27
  Speaker 1: fees were what they were. This has really been half
• 3:30
  Speaker 1: a century of feet pressure.
• 3:32
  Speaker 2: Yeah, So when I talk about how investors respond to
• 3:35
  Speaker 2: lower fees, it happened with Vanguard two. Vanguard's first index
• 3:39
  Speaker 2: fund was priced at sixty six basis points, right around
• 3:41
  Speaker 2: what mutual funds were, or the cheaper side, And over
• 3:44
  Speaker 2: time no one cared at first because that was still
• 3:46
  Speaker 2: kind of pricey. But over time they kept cutting the
• 3:48
  Speaker 2: fee because of the way their structure is. So when
• 3:50
  Speaker 2: they got into like the two thousands, they're now at
• 3:52
  Speaker 2: like fourteen twelve basis points really cheap. Then they hit
• 3:56
  Speaker 2: two thousand and eight twenty ten, they go under ten.
• 3:59
  Speaker 2: Once you get under ten and you're in like irresistible area,
• 4:03
  Speaker 2: people go gaga for something that's got the single digit
• 4:05
  Speaker 2: basis point fee. And why not. There's been major studies
• 4:08
  Speaker 2: that show if you pay like a couple basis points
• 4:11
  Speaker 2: over thirty forty years, you get so much more of
• 4:14
  Speaker 2: the compounding returns versus the asset manager.
• 4:17
  Speaker 1: So why is this important? Why do a few basis
• 4:20
  Speaker 1: points here or there matter? Can that can't possibly add
• 4:24
  Speaker 1: up over decades?
• 4:25
  Speaker 2: Can it? It does. So when Bogel was trying to
• 4:28
  Speaker 2: sell the index fund, everybody thought, oh, it's average. I
• 4:30
  Speaker 2: don't want to be average. I don't want to be
• 4:32
  Speaker 2: worked on by an average doctor. It was hard to
• 4:34
  Speaker 2: sell average to the American public. We want winners. One
• 4:37
  Speaker 2: chart he used that was very compelling, and I tell everybody, look,
• 4:40
  Speaker 2: go look this up. It's a chart of the growth
• 4:42
  Speaker 2: of ten thousand dollars over fifty years. One of it
• 4:45
  Speaker 2: makes makes eight percent a year, and the other makes
• 4:47
  Speaker 2: six percent a year. The two percent would be the
• 4:49
  Speaker 2: fees you pay the active fund plus the turnover and
• 4:51
  Speaker 2: trading costs. The eight percent would be paying no fees.
• 4:55
  Speaker 2: The no fees you get something like three hundred and
• 4:58
  Speaker 2: sixty thousand dollars six percent. Compounding only gives you like
• 5:02
  Speaker 2: one hundred and seventy thousand dollars double, basically double. And
• 5:06
  Speaker 2: so when you put it in dollars and cents like
• 5:08
  Speaker 2: that over time, it really matters. And to put that
• 5:11
  Speaker 2: another way, that's eight percent. That took sixty percent of
• 5:14
  Speaker 2: your total returns over those fifty years. So with the
• 5:18
  Speaker 2: no fee you get basically ninety eight percent something like
• 5:21
  Speaker 2: that of the total returns. Because Remember we're all here
• 5:24
  Speaker 2: for one reason. Compounding returns the magic of compounding, and
• 5:28
  Speaker 2: as those returns compound, the lower the fee is, the
• 5:31
  Speaker 2: more that beautiful magic ends up in your pocket.
• 5:34
  Speaker 1: And if you're talking about larger investment dollars, Vanguard put
• 5:39
  Speaker 1: out a research piece some time ago that if you
• 5:42
  Speaker 1: put up a million dollars and let a compound over
• 5:44
  Speaker 1: thirty years, by the time you're at the end of
• 5:47
  Speaker 1: those thirty years, that feed differential is about thirty percent.
• 5:52
  Speaker 1: So if you start out with only one hundred, it's double.
• 5:55
  Speaker 1: But you know, just to talk in terms of percentage,
• 5:59
  Speaker 1: it's not insubstantial after two or three decades.
• 6:02
  Speaker 2: Yeah. Absolutely, So the difference between paying like eighty basis
• 6:06
  Speaker 2: points versus like eight is major. Now when we get
• 6:10
  Speaker 2: to eight to seven, it's a little less consequential. So
• 6:14
  Speaker 2: that's why I say, do we need a zero fee
• 6:16
  Speaker 2: ETF for fun? Not really. I think once you get
• 6:18
  Speaker 2: below five you're good. I don't think people. In fact,
• 6:21
  Speaker 2: there's almost a case you made that people sometimes repel
• 6:24
  Speaker 2: from zero. They feel like it's a gimmick, perhaps right.
• 6:26
  Speaker 2: And so what we found is that if you look
• 6:28
  Speaker 2: at Advisor surveys, the two most important criteria for them
• 6:32
  Speaker 2: in picking an ETF. Number one is fee. Number two
• 6:34
  Speaker 2: is brand. That's why we tend to see the money
• 6:38
  Speaker 2: going to the big brands. Let's say Vanguard, Blackrock definitely,
• 6:42
  Speaker 2: but also State Street, Invesco, Schwab. These brands plus a
• 6:46
  Speaker 2: low fee irresistible. But if you take a b a
• 6:49
  Speaker 2: brand that's not known for this. There was a company
• 6:51
  Speaker 2: called Focus Shares back in the day. They tried to undercut.
• 6:54
  Speaker 2: Nobody really cared because nobody knew that brand and it
• 6:57
  Speaker 2: felt gimmicky. So that's why I think the brand is
• 6:59
  Speaker 2: all so important here. It's not just the low fee,
• 7:01
  Speaker 2: it's the low fee plus the brand that is almost
• 7:04
  Speaker 2: like an irresistible value proposition for most people. Let me
• 7:08
  Speaker 2: throw a little bit of a curve ball at you.
• 7:10
  Speaker 2: We're talking about mutual funds and ETFs, but the reality
• 7:14
  Speaker 2: is that's twenty twenty five trillion dollars. There's still another
• 7:17
  Speaker 2: fifty trillion inequity and another I don't know, seventy five trillion.
• 7:21
  Speaker 1: In bonds behind that. How significant are ETFs and mutual
• 7:25
  Speaker 1: funds to how people manage their assets?
• 7:29
  Speaker 2: I think they're huge because in the end, consumers typically
• 7:32
  Speaker 2: like convenience. If you make something more convenient, you're probably
• 7:35
  Speaker 2: going to find some customers. And so to me, a
• 7:38
  Speaker 2: mutual fund really pushed the envelope to make convenient. You
• 7:41
  Speaker 2: give me your money and I'll take care of buying
• 7:44
  Speaker 2: all the stocks. We'll get diversification going that way. We
• 7:46
  Speaker 2: don't like have we don't pick one stock and it
• 7:49
  Speaker 2: goes to zero, we lose all our money. We'll diversify
• 7:51
  Speaker 2: and I'll manage it for you. The problem is the
• 7:54
  Speaker 2: mutual fund structure isn't nearly as efficient or there's a
• 7:59
  Speaker 2: multiitude of reasons. The ETF structure, in my opinion, is
• 8:03
  Speaker 2: a better vehicle to deliver what a mutual fund tries
• 8:06
  Speaker 2: to deliver, whether that's active, passive, or whatever. ETFs tend
• 8:10
  Speaker 2: to be more efficient, tax efficient, they tend to be cheaper.
• 8:14
  Speaker 2: They are you're able to get in and out them
• 8:15
  Speaker 2: whenever you want. Mutual funds only one time a day,
• 8:18
  Speaker 2: and they really fit nicely on brokerage platforms, which most
• 8:21
  Speaker 2: people use. And so to me, ETFs are sort of
• 8:23
  Speaker 2: the vehicle for the twenty first century. I've often compared
• 8:26
  Speaker 2: them to the MP three, whereas the mutual fund is
• 8:29
  Speaker 2: kind of like a compact disc MP three. I now
• 8:32
  Speaker 2: can buy exactly the songs I want, or if you
• 8:33
  Speaker 2: stream and you can add this flexibility. It fits on
• 8:36
  Speaker 2: your phone better, compact disc harder to you know, lug
• 8:38
  Speaker 2: them around. So I think every industry goes through this.
• 8:41
  Speaker 2: I would also say an uber to the cab that's
• 8:44
  Speaker 2: another industry. Uber uses the Internet. It's cleaner like some
• 8:47
  Speaker 2: there's always these disruptive events, and so ETFs are big.
• 8:50
  Speaker 2: But I got to say ETFs at eighty basis points
• 8:54
  Speaker 2: wouldn't be a big deal. They're only really popular in
• 8:56
  Speaker 2: sweeping the country because they're cheap, and you have to
• 8:59
  Speaker 2: give van guard in Bogel credit. That's where even though
• 9:02
  Speaker 2: he didn't like ETFs, he had this monumental impact on them.
• 9:05
  Speaker 2: So to me, whether it's an index, spetra fund or
• 9:07
  Speaker 2: an ETF, the bigger trend is the great cost migration.
• 9:11
  Speaker 2: And you got to go back to Bogel on that.
• 9:14
  Speaker 2: That said, when it comes to getting investments in a
• 9:16
  Speaker 2: low fee format, I think the ETF vehicle is the
• 9:19
  Speaker 2: one most people prefer.
• 9:21
  Speaker 1: Thanks Eric, really interesting stuff, just a relentless pressure on
• 9:26
  Speaker 1: prices that saved investors trillions of dollars but more importantly,
• 9:31
  Speaker 1: we are aware of the impact of compounding. Ten twenty
• 9:36
  Speaker 1: thirty basis points makes a huge difference over time, especially
• 9:40
  Speaker 1: if we're talking about decades, and so what lower fees
• 9:43
  Speaker 1: mean is better performance over the long haul for investors.
• 9:49
  Speaker 1: I'm Barry Ridolts. You've been listening to Bloomberg's At the Money.
• 10:01
  Speaker 1: What I said the father as a problems. You know
• 10:08
  Speaker 1: you want to say it's father as the plums. I
• 10:16
  Speaker 1: did be let it through. It's father as a plows.
• 10:23
  Speaker 1: What I'm going to do