ILLUSTRATION BY PATRIK MOLLWING36
just over $500, according to the Securities and
Exchange Commission’s online fund cost calculator.
It’s not only ETFs’ management fees that are
falling. Unlike mutual funds, ETFs have to be pur-
chased through a brokerage, like a stock. But
increasingly, it’s possible to trade in and out of
them with no commission. Trading in individual
stocks, meanwhile, fell to $4.95 per trade earlier
this year at Fidelity Investments and Charles
Schwab. And the startup Robinhood Financial LLC
is trying to woo younger investors to its app-based
brokerage platform with free stock trades—it makes
money in part by selling premium accounts with
after-hours trading and access to margin loans.
The race to zero is even more pronounced in
the business of advice. There, Schwab has attracted
$23 billion to its Intelligent Portfolios, an online
service that creates a portfolio of ETFs for an inves-
tor at no charge, compared with the 1 percent per
year many advisers can charge. Of course, for con-
sumers, the proliferation of all this free and close-to-
free stuff raises a question: Is cheap always a bargain?
It can mean accepting some limitations.
Commission-free ETF trades are usually confined
to a small group of funds, according to Alois Pirker,
research director at Aite Group LLC’s wealth man-
agement practice. This isn’t necessarily a bad thing
for investors who just want a basic, broadly diversi-
fied fund. “If it’s an S&P 500 ETF, it doesn’t matter
who manufactures it, necessarily,” he says.
Behind a headline price tag of free, companies
have ways of generating revenue from some prod-
ucts. The underlying ETFs in Schwab’s online
advice service still have annual fees, and many of
those funds are run by Schwab. A portfolio for an
aggressive investor may have an average cost of
0.22 percent per year. Schwab also makes money
when it allocates some of its clients’ money to cash,
which it can then invest and profit from. Schwab
rival Betterment LLC, whose online advice service
costs 0.25 percent per year, has argued that this
gives Schwab an incentive to put too much in cash.
Schwab spokesman Michael Cianfrocca says cash
can provide better returns than other low-risk alter-
natives, after accounting for their fees.
Over an asset base of billions of dollars, a few
pennies here and there can add up for an asset
manager. Still, the march toward free is putting
many people in the financial-services business under
pressure. Stock trading and portfolio allocation—
once the main reasons people hired a broker—have
been turned into ultracheap commodities. Advisers
are looking for ways to avoid obsolescence, and
selling more complex products is one of them.
You can see that most clearly in the part of the
business aimed at wealthier individual investors—
not the ones with family offices and Learjets, but
those in the near-millionaire to mere-millionaire
range. Private equity giant Blackstone Group LP
has been courting advisers—more than 3,000 since2012—as part of a program it calls Blackstone U.
Participants have been flown to New York to visit
its Midtown Manhattan high-rise offices, where
they’re educated about alternative strategies,
including private equity, real estate, and hedge
funds. “They see the benefit of differentiation,”
says Joseph Lohrer, national sales manager for
Blackstone’s private wealth management group.
“They say, ‘I can build better portfolios if I incor-
porate alternatives, but I feel that I am not in a
confident position to make that happen, and this
program allows me to take a huge jump in under-
standing and integrating alternatives.’ ”
For regulatory reasons, the average investor is
locked out of many alternative investments. But
Blackstone is looking for ways to push deeper into
the mass affluent market. The company already has
a mutual fund that allocates money to hedge fund
managers, the Blackstone Alternative Multi-Strategy
Fund. Part of the case for such investments is that
they can offer investors diversification they weren’t
getting before. In exchange, however, they also carry
higher fees. Blackstone’s mutual fund, for example,
costs more than 2 percent of assets per year.
Less-wealthy investors, too, are being pitched
more complex strategies, such as smart-beta, which
proposes to improve on indexing by tweaking the
formula for weighting stocks—essentially automat-
ing a kind of active management. But costs are
getting squeezed there as well: Goldman Sachs Asset
Management offers a smart-beta ETF for 0.09 percent
of assets per year. “No one really wants to go out
there and offer their stuff for free, but all the money
is really going in that direction,” says BI’s Balchunas.
“It’s as if the ETF space is the battleground that’s
maturing, and now they’re going to inch into active,
quant, and beyond.” —Simone Foxman
THE BOTTOM LINE Fund management, advice, and trading are
getting cheaper as companies race to gather assets. That doesn’t
mean they’ve given up trying to find something to sell.○ In the past year, index
funds with expenses
of 0.1 percent or less
attracted$509b
PERSONAL FINANCE Bloomberg Businessweek October 30, 2017