Despite the financial industry’s efforts to make fees more transparent, investors are still in the dark.
Confusion exists about how investors pay for both investment products and the guidance they receive from an advisor, State Street Global Advisors found in a new survey. An overwhelming majority indicate they are at least aware of what expense ratios and basis points are, however less than one-third feel they understand each “completely.”
Nearly half (47%) of investors believe the management costs of investments like mutual funds and ETFs are already included in the fee they pay their advisors or investment platform. Notably, investors currently working with an advisor (60%) are more likely to agree with this, versus 37% of self-directed investors.
The younger the investor, the more likely they are to agree with this false statement: 71% of Millennials agree versus 51% in Generation X and 36 percent of Boomers, who presumably have had more investment experience over their lifetime.
Similarly, there is a lack of understanding about the meaning of diversification. While the vast majority of investors (85%) agree “a well-diversified portfolio is one with a variety of investments that reduce stock market risk,” 55% incorrectly believe, “a well-diversified portfolio is having investments in a variety of accounts at different firms or investment platforms.”
“Comprehension of investment product fees—and fees in general—is low even among those working with an advisor,” Brie Williams, Head of Practice Management at State Street Global Advisors, said in a statement. “This underscores how much work our industry has to do when it comes to price transparency and investor education.”
How low is ‘low-cost?’
While the overall awareness of costs at the investment product level seems to be high, understanding of what the specific costs actually are is low.
The survey found an overwhelming majority of investors say they are at least aware of what expense ratios are (87%) and what basis points are (83%), however, less than one-third say they understand each “completely.”
More self-directed investors than advised investors say they have a complete understanding of what these terms mean (34% versus 24% respectively for expense ratio; 30% versus 19 % respectively for basis points).
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
