Skip to Main Content
SUBMIT A TIP RECEIVE DAILY NEWS
Menu AdvisorHub
  • News
      • Latest News
          • Walmart bankWalmart Hires Two Goldman Execs to Oversee Expansion into Financial Services
          • Morgan StanleyMorgan Stanley’s Recruiting Loan Balance Jumps Back Above $3 Billion
          • Advisors moving to FloridaMerrill to Ramp Up Private Wealth Business in Florida
          • Merrill advisors Alpesh R. Patel, Matthew Birkett and Darren Siegrist moved to Rockefeller along with client associates Hai Dang and Chris Iwamasa.Merrill Loses $3-Mln Team to Rockefeller in CA, $2-Mln Group to Texas RIA
        • Close
      • Advisor Moves
          • Merrill advisors Alpesh R. Patel, Matthew Birkett and Darren Siegrist moved to Rockefeller along with client associates Hai Dang and Chris Iwamasa.Merrill Loses $3-Mln Team to Rockefeller in CA, $2-Mln Group to Texas RIA
          • Bonus for financial advisorRayJay Details Recruiting Offer Hikes, Drops Some Clawback Provisions
          • Montgomery, Alabama.Merrill Lifer and His $4.4-Mln Alabama Team Jump to Morgan Stanley
          • Advisor considering independenceExclusive: Rockefeller Lures Merrill Private Wealth Regional Head in Chicago
        • Close
      • Enforcement
          • Dining expenseFinra Dings Ex-Morgan Stanley Broker in Los Angeles over Expense Lapse
          • Judge rulesFinra Bars Ex-Wells Broker Who Raised $3.5-Mln For Software Company
          • Advisor fraudFinra Suspends Former NJ Broker Who Borrowed from Clients to Pay Debts
          • Finra rulingArbitrator Grants Ex-Merrill Bank Broker’s Expungement, Calls Firing ‘Reckless’
        • Close
      • Markets
        • `Nothing Safer Than Cash’: Tech Rout Puts Silicon Valley on Edge
        • ‘Any News Is Bad News’ as Earnings Fail to Save Equity Bulls
        • ‘50 Cent’ Profited From Volatility Jump, Wells Fargo Says
        • ‘Beaten Down’ ETF Is a Way to Play Inverted Curve, BofA Says
        • Close
      • Opinion
          • Opinion-How-Will-The-Coronavirus-Affect-The-Stock-Market-Opinion: Coronavirus – What Advisors Need to Know
          • opinion-investors-conquered-fees-next-up-is-their-own-behaviorOpinion: Investors Conquered Fees but Not Their Own Behavior
          • Investor-Confidence-In-Stocks-Rightly-Declines-Opinion-772x485Investor Confidence in Stocks Rightly Declines: Opinion
          • Opinion-Schwabs-Zero-Commission-Decision-Challenges-Its-Ria-ClientsOpinion: Schwab’s Zero Commission Decision Challenges Its RIA Clients
        • Close
      • Fintech News
          • Fintech Cryptocurrency ClearingFintech Firm Apex Clearing Agrees to Go Public Via SPAC
          • System outageMerrill Systems Hiccuped on Thursday as Stocks Slid
          • 7 dollar rolls‘The Rock’ Invests in Finance App Acorns, and New Users Get $7
          • TraderHigh-Frequency Traders Love Business With Robinhood
        • Close
      • From the Publisher
          • 2021 PredictionsFrom the Publisher: Sirianni’s Predictions for 2021
          • Josh Rogers – 772×485Seven Questions with Tony Sirianni: Josh Rogers, Founder and CEO, Arete Wealth
          • Phil Hildebrandt — 772×485Seven Questions with Tony Sirianni: Phil Hildebrandt, Principal, CEO of Segall Bryant & Hamill
          • Christian Hyldahl, President of Varium Investment Partners-772×485An AdvisorHub Interview with Christian Hyldahl, President of Varium Investment Partners
          • John Peluso – 772×485Timely interview with John Peluso and AdvisorHub CEO Tony Sirianni
          • Louis Dworsky Coronacrash Interview-772×485Coronacrash Update: Hayden Royal’s Louis Dworsky & Tony Sirianni
          • Stratos_Jeff pic.jpg-772×485Coronacrash Update: Stratos Wealth Partners’ Jeff Concepcion & Tony Sirianni
          • coronacrash ben harrison – 772×485Coronacrash Update: BNY Mellon | Pershing’s Ben Harrison & Tony Sirianni
        • Close
    • Close
  • Deals & Comp
  • Recruiting Wire
  • Breakaway Center
  • Resources
    • resources-home-menuResources Home
    • PRACTICE MANAGEMENT RESOURCESPractice Management Resources
    • Transition ResourcesTransition Resources
    • Fintech ResourcesFintech Resources
    • menu fintechFintech Product Directory
    • Menu-Institute-772×485Institute
    • Boutique Wealth AdvisorsBoutique
    • EventsEvents
    • Asset Manager Hub
    • Close
  • AdvisorHub TV
  • Podcasts
  • RIA Center
  • Virtual Summit
close X
December 26, 2019

Opinion: Investors Conquered Fees but Not Their Own Behavior

by Nir Kaissar
|
News, Opinion
|
behavioral economics, investing
|
No Comments
Share This
SUBMIT A TIP
opinion-investors-conquered-fees-next-up-is-their-own-behavior
Getty Images

(Bloomberg Opinion) — Investors have beaten the money managers. Their next adversary will be even more difficult: themselves.

It’s impossible to overstate the magnitude of the changes that have swept through the investment industry over the last decade. Until recently, investors looking to grow their money encountered high fees everywhere, from brokerage commissions to fund and advisory fees. The combined tolls routinely amounted to more than 2% of their savings every year and much more in some cases. There were few avenues of escape despite mounting evidence that higher fees lead to lower returns, the industry’s emphatic denials notwithstanding.

After the 2008 financial crisis, however, a wave of investors decided they had enough. Aided by a burgeoning line of low-cost exchange-traded funds and robo-advisers offering online money management for a fraction of the cost of traditional advice, investors fled to cheaper options. They plowed roughly $3.8 trillion into index mutual funds and ETFs from 2010 through October while yanking $250 billion from traditional actively managed mutual funds, according to Morningstar. Investors have also handed an estimated $250 billion to robo-advisers, much of it invested in index funds.

Granted, more money is still managed the expensive way, but the gap is closing. Roughly $1.6 trillion was invested in index mutual funds and ETFs at the end of 2009, compared with $6.2 trillion in actively managed mutual funds. Now those numbers are closer to $8.1 trillion and $11.8 trillion, respectively. And sure, robo-advisers still manage a pittance compared with the money invested elsewhere, but no one doubts that online investing will continue to gather adherents, which is why Wall Street firms are rolling out robo-advisers of their own.

In any event, arguments about the significance of the flows to low-cost options miss the essence of the decade’s revolution, which is that investors now have myriad options to invest cheaply and thereby bolster their savings. And enough of them are focused on cost that financial firms are warring over who can offer the cheapest investments. There are now zero-fee funds and zero commissions, both unthinkable a decade ago. Even the once inviolable 1% asset management fee is on the chopping block.

Still, declaring victory would be premature because there are other — arguably even more stubborn — costs to cut: the ones investors impose on themselves. They sit on cash too long, chase investment fads during booms and panic-sell during busts, to name just a few common cognitive and emotional lapses. But too little attention is paid to those mistakes, and for obvious reasons. It’s easier for investors to blame the financial industry for their sagging portfolios than confront their own poor choices. It’s also easier — and more lucrative — for financial firms to pander to investors’ worst instincts than help subdue them.

How costly are those mistakes? It’s hard to know exactly, which is yet another enabler. It’s far easier to quantify the cost of fees on portfolios than the impact of behavior, which gives investors a convenient excuse to avoid introspection. But there are some reasonable attempts to estimate the so-called behavior gap, or the difference between the return of an investment and how much of that return investors manage to capture.

One of them is Morningstar’s recently released “Mind the Gap” study. The study estimates the behavior gap for U.S. mutual funds and ETFs over 10-year periods ended each year between 2014 and 2018, and the same number of five-year periods for a handful of other countries.

First, the bad news. The average behavior gap in the U.S. was  -0.45% a year across all investment categories, including stock, bond, alternative and asset-allocation funds. That’s roughly the difference between the average expense ratio for traditional actively managed funds and index funds. The behavior gap was only worse in Europe (-0.53%) and Singapore (-1.19%).

The good news is that the details behind the headline numbers offer hints about how investors might close the gap. One clue is that the gap varies drastically depending on investment type. In the U.S., for example, stock and bond investors gave up 0.56% and 0.55%, respectively, while the gap for asset-allocation funds was a positive 0.22%.

Why did investors in allocation funds fare so much better? As the study notes, allocation includes target-date funds held almost exclusively in 401(k)s, where savers tend to invest regularly and pay little attention. That combination of disciplined investing and benign neglect also appears to have contributed to the success of investors in Australia and South Korea, which boast a positive behavior gap of 0.65% and 0.26%, respectively, due in part to broad adoption of systematic investing that keeps savings flowing to markets regularly.

Another clue is that the gap appears to be related to the volatility of the investment. Morningstar sorted stock, bond and allocation funds into quintiles based on standard deviation, a common measure of risk. In the U.S., the behavior gap worsened across all three categories as volatility rose. For the most volatile quintile of stock funds, the gap was a whopping -1.86%. The results were generally similar around the world. The key insight is that just because an investment promises a higher return in exchange for more risk doesn’t mean investors will capture it; when humans are involved, sometimes less risk translates into a higher return.

There are some caveats around all this. One is that investors don’t always control the timing of their investments, so some of the behavior gap may be attributed to luck rather than behavior. Also, more data is needed. The numbers in the U.S. stretch back to 2005, so they include just the one bear market around the 2008 financial crisis. And outside the U.S., the numbers begin in 2010. Given the apparent link between volatility and behavior, the gaps are likely to widen during the next downturn.

The last decade will be known for the low-fee revolution. Let’s hope the next one is equally revolutionary when it comes to changing investors’ behavior.

Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

 

Like this article? Let AdvisorHub come to you!  Sign up

Share This
No Comments

Leave a Reply Cancel reply

Tony Sirianni Podcast Banner

CORONACRASH NEWS

  • Big U.S. Banks’ Vows to Halt Job Cuts End as Virus Endures

    Big U.S. Banks’ Vows to Halt Job Cuts End as Virus Endures

    Feb 26, 2021
  • Raymond James Executive: We’re Open to Flexible Work Arrangements for Advisors

    Raymond James Executive: We’re Open to Flexible Work Arrangements for Advisors

    Feb 25, 2021
  • Finra Bars Ex-Wells Broker Accused of Improperly Seeking Virus Relief Loan

    Finra Bars Ex-Wells Broker Accused of Improperly Seeking Virus Relief Loan

    Feb 12, 2021
  • RayJay Private Client Profit Dips 8%, Employee Channel Recruiting Slips

    RayJay Private Client Profit Dips 8%, Employee Channel Recruiting Slips

    Jan 28, 2021
  • Finra Scrutinizes Brokers Who Took PPP Loans for Potential Violations

    Finra Scrutinizes Brokers Who Took PPP Loans for Potential Violations

    Jan 25, 2021

NEWS

  • Walmart Hires Two Goldman Execs to Oversee Expansion into Financial Services

    Walmart Hires Two Goldman Execs to Oversee Expansion into Financial Services

    Mar 1, 2021
  • Morgan Stanley’s Recruiting Loan Balance Jumps Back Above $3 Billion

    Morgan Stanley’s Recruiting Loan Balance Jumps Back Above $3 Billion

    Mar 1, 2021
  • Merrill to Ramp Up Private Wealth Business in Florida

    Merrill to Ramp Up Private Wealth Business in Florida

    Feb 28, 2021
  • Merrill Loses $3-Mln Team to Rockefeller in CA, $2-Mln Group to Texas RIA

    Merrill Loses $3-Mln Team to Rockefeller in CA, $2-Mln Group to Texas RIA

    Feb 26, 2021
  • Finra Dings Ex-Morgan Stanley Broker in Los Angeles over Expense Lapse

    Finra Dings Ex-Morgan Stanley Broker in Los Angeles over Expense Lapse

    Feb 26, 2021

Recruiting Winners: 2020 Year in Review

FINANCIAL INDUSTRY PODCASTS

AllIndependence
The must listen-to podcast for financial advisors by Tony Sirianni. Guests to include:
-Ron Kruszewski
-Shirl Penney
-Penny Pennington
-Eric Clarke
and many more
Michael Kitces and Carl Richards discuss financial advising topics.
The “new advice value stack,” and how firms can use it to help maximize their own value propositions for their clients.
Interviews and insights for advisors curious about switching to a new broker dealer.
The Brighthouse Financial Insights Panel is a group of leading, independent experts providing powerful insights into the big challenges facing you and your clients.
Powering Independence Podcast, insights and ideas for RIAs, presented by Dynasty Financial Partners. A podcast dedicated to presenting fresh ideas and best practices for the wealth management industry.
As an industry expert, Frank LaRosa provides guidance and advice on a host of topics from recruiting and transitions, succession planning, practice management, M&A and more.
Our goal is to unlock the challenges to reveal the opportunities and what it means to provide advice in the 21st century.
Go behind the scenes with registered investment advisors and other related independent business model experts
As a nationally recognized recruiter and consultant to financial advisors, Mindy Diamond has unmatched experience in introducing advisors to the independent space.
The must listen-to podcast for investors, venture capitalists and financial advisors, with Tony Sirianni and Paul Dietrich.
An Introduction to Independence: 5 Key Episodes to Jumpstart Your Knowledgebase
Jay is an investment strategist, CERTIFIED FINANCIAL PLANNER™ and business consultant to financial advisors.
We interview top financial advisors and visionary voices to bring you the strategies, tips, and tools you need to make a difference in people’s lives.
A financial literacy and commentary show that features a number of investors, financial experts, professional athletes, business owners and more.
Join Sound Financial Group CEO Paul Adams and President Cory Shepherd every week, as they help you Design and Build a Good Life™.
The Kuderna Podcast, focusing on wealth in it's original meaning- a state of well being.
Timeless wisdom, actionable information you can use right now to make smarter investment decisions.
Made for and dedicated to those folks serious about their financial plan.
Suzanne Siracuse asks the questions nobody else asks, as influencers and interviewer collide in her new and truly unique podcast series The Big Reveal.
Our webcast is dedicated to helping our viewers get real insights by avoiding the cognitive dissonance of today’s media outlets and biased editorial filters.

Latest News 
Advisor Moves 
Enforcement 
Opinion 
  • About Us
  • Contact Us
  • Advertise
  • Events
  • Careers

 get our newsletter

Industry focused content and breaking news.

SIGN UP

Contact Us

EMAIL US
1707 Post Oak Blvd.
#484
Houston, TX 77056

© 2021 AdvisorHub
  • |Terms of Use
  • |Privacy Policy
  • |Advertise
  • |Careers
  • Facebook
  • Linkedin
  • Twitter

Back to top