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Robin Powell






An experienced television journalist, Robin runs Regis Media, a UK-based content marketing consultancy which helps financial advice firms around the world to attract, retain and educate clients.

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What do free index funds mean for financial advisers?

So, it’s finally arrived. The age of “free” index funds is upon us.

Fidelity announced last week that it’s making two zero-fee equity funds available to US investors — the Fidelity Zero Total Market Index Fund for US stocks, and the Fidelity Zero International Fund for stocks outside the US.

Investors who buy the funds directly from Fidelity will genuinely pay nothing, and that includes transaction fees. Nor will any money be spent on marketing the funds.

One of the reasons why Fidelity is able to offer zero-fee funds is that it’s creating its own indexes to track, instead of licensing an index like the S&P 500. It also hopes to make money from the funds through stock lending.

But what does all this mean for the financial advice profession? Here are the views of advisers, authors, bloggers and other thought leaders from the US, the UK and around the world.

United States

“Psychologically, (the advent of zero-fee funds) could put more emphasis on the idea that an adviser's job is to provide planning, emotional, and contextual support to clients. When an investing product costs nothing, it reiterates the point that there is no value in the specific stock-selection and investment acumen side of the business, where advisers used to claim their value.”

Morgan Housel, Partner at Collaborative Fund | Blog | @morganhousel

“Investment advisors are stubbornly clinging to AUM-based fees, but there will be increased pressure on them to justify these fees. I understand the rationale, but think about it this way: If an adviser recommends two index funds that capture the global market returns for stocks, and the funds charge no management fee, how logical is it for the adviser to charge any meaningful fee for that recommendation?”

Dan Solin, sales and marketing consultant to advisers | Website | @dansolin

"The financial advice profession, including robo-advisers, have embraced the low-cost fund/ ETF model. The trend toward the commodification of asset allocation and portfolio management is already firmly in place. This development confirms that financial advisors will need to prove their value to clients in ways that go beyond portfolio construction.”

Tadas Viskanta, Director of Investor Education, Ritholtz Wealth | Blog | @abnormalreturns

"For the advice profession it’s good news and bad news. The good news is advisers can implement their advice for clients even more cheaply than before using low-cost or free funds. The bad news is that the trend toward unbundling and lower cost will not stop at investment products. Advice fees will come under further scrutiny, with enabling technologies like robo-advice and increasing transparency catalysing this trend.”

Jeff Ptak, Global Director, Manager Research, Morningstar | Article archive

“Now that asset management is down to zero or nearly zero, I expect to see fee pressure on financial advisers. Firms that are not prepared to demonstrate value to clients will have a hard time justifying their fees. Quality advice cannot be free, however, and clients will likely gravitate towards the firms offering the most value.”

Blair DuQuesnay, Investment adviser and financial planner | Blog | @BlairHDuQuesnay

“Investors will struggle to navigate the flurry of index funds, creating an opportunity for sophisticated advisers to help them distinguish between smart innovations and gimmicks. And it’s not a moment too soon because the days of fund companies paying advisers to sell their wares are ending.”

Nir Kaissar, financial adviser and Bloomberg columnist | Article archive | @nirkaissar

United Kingdom

“From an adviser’s point of view, anchoring your value proposition to an active manager whose outcome you have very little control over is no longer viable. The job of an adviser has now shifted to helping clients capture market return by managing clients' behaviour. That’s an enduring value proposition.”

Abraham Okusanya, Director of FinalytiQ | Blog | @AbrahamOnMoney

“It’s about time that the cross subsidy from fund management to advice was exposed. The Work and Pensions Select Committee has just launched an enquiry into the cost of advice. If fund management is effectively free — why do advisers cost 1%+ to tell us what do do with fund managers?

Henry Tapper, Founder of Pensions PlayPen | Blog | @henryhtapper

“I don’t think it will make a huge impact. Anything where the question of fees comes to the forefront will challenge the advice industry (why am I paying for you if Fidelity will do it for nothing? etc.?) But in reality I think there is a reason the robo advisors are struggling to take off. People want the human touch in their finances, and know that financial expertise doesn’t come cheap. Nor would you want it to.”

Lars Kroijer, Danish author and former hedge fund manager | Website | @larskroijer

“We’ve been saying for years that investment management is just a commodity and the majority of investors would be better served investing in low-cost index funds rather than paying 1% to a portfolio manager because it’s not where the value is added. The value is in financial planning, so it’s great news for financial planners as more people will begin to realise that what they need is a financial planner, not a portfolio manager.”

Carolyn Gowen, Partner of Bloomsbury Wealth and blogger | Blog | @CarolynGowen

Rest of the world

“This will continue to pressure high-cost investment firms. It puts index funds in the spotlight. With some luck, more British and expatriate investment firms will say, ‘We can't beat the market, so we might as well build clients portfolios of index funds instead’. Instead of fruitlessly trying to pick ‘winning funds’, many financial advisers will focus more of their time on adding value, instead of subtracting value. They'll have more time to focus on retirement planning, estate planning, tax planning and children's savings plans. This is how the industry should work.”

Andrew Hallam, author and speaker, based in Canada and the UAE | Blog | @aphallam

“The arrival of the ‘zero fee’ index fund simply means that fiduciary advisers have yet another building block available to build best in class portfolios for clients.

“As fiduciary advisers, our focus should always be on giving the client the best possible financial strategy covering cashflow, tax, structuring and anything else that helps them achiever their goals and have the certainty they crave.

“Then they need an investment solution that won’t let them down. While ‘low-cost’ isn’t everything, every basis point left in the client’s pocket helps!”

David Andrew, CEO of Capital Wealth Partners and author, Perth, Australia | Website | @davidlandrew

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