Data & Research October 26, 2021

Morningstar Finds ESG Funds Are More Expensive Than Conventional Funds

In general, fund fees continue to decline, including those of actively managed funds.

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The average expense ratio paid by fund investors has been falling for more than two decades, according to Morningstar’s “2020 U.S. Fund Fee Study.”

Last year, the asset-weighted average expense ratio of all U.S. open-end mutual funds and exchange-traded funds (ETFs) was 0.41%, compared with 0.93% in 2000. From 2019 to 2020, the asset-weighted average expense ratio fell from 0.44% to 0.41%. As a result, Morningstar estimates investors saved nearly $6.2 billion in fund expenses last year.

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The asset-weighted average expense ratio for passive funds fell to 0.12% in 2020 from 0.13% in 2019, thanks to steady flows into the lowest-cost funds, the study report says. Active funds, which are discouraged by some in the retirement plan industry, in part because of their higher fees, also had a decline in fees from 0.65% in 2019 to 0.62% in 2020. Morningstar says this is driven mainly by large net outflows from expensive funds and share classes and, to a lesser extent, inflows to cheaper ones.

In 2020, the cheapest 20% of funds saw net inflows of $445 billion, with the remainder seeing outflows of $293 billion.

The Morningstar report says investors in sustainable funds are paying a “greenium” relative to investors in conventional funds. The study found a higher asset-weighted average expense ratio for environmental, social and governance (ESG) funds (0.61%) compared with their traditional peers (0.41%). The Department of Labor (DOL) recently proposed new regulations regarding ESG investing in retirement plans, which is expected to encourage the use of ESG funds.

Morningstar notes that strategic-beta funds are an alternative to higher-cost actively managed funds, and, in 2020, the asset-weighted average fee for strategic-beta funds was 0.18%—slightly higher than the fee for traditional index funds (0.11%) but significantly lower than for active funds.

Products October 26, 2021

Fidelity Program Aims to Facilitate Easier Wealth Transitions

Fewer than four in 10 advisers say they have a successful track record of partnering with their clients’ children or spouses on successful wealth transitions, meaning the stability and longevity of many advisers’ practices may be in question.

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Fidelity Institutional, the division of Fidelity Investments providing technology, solutions and insights to wealth management firms and institutions, has announced a new program designed to help advisers drive deeper engagement with clients and their families.

The program is referred to as “The Decade of Generational Wealth” and was developed by the Fidelity Center for Family Engagement. It outlines eight strategic imperatives for advisers to help establish successful family wealth transitions, with the related goal of helping advisers ensure the future success of their businesses.

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According to Fidelity survey research, 58% of Millennial and Generation Z investors expect to inherit assets in the future, often amounts that would represent a sizeable addition to their current assets. On the other hand, only 39% of advisers say they have a successful track record of partnering with the next generation through a wealth transition. Furthermore, fewer than half (46%) of advisers say they are successfully partnering with female clients through a wealth transition.

“Our research found a disconnect between what the client of the future is expecting and what advisers are delivering,” says Tobias Donath, senior vice president, Fidelity Center for Family Engagement. “So, our goal is to help advisers use this decade to look around the corner and proactively adapt their business.”

The strategic imperatives underpinning the Fidelity program include the following:

  • Navigating change of control with the primary decisionmaker;
  • Facilitating transparency and family engagement in planning;
  • Empowering women as head of households and as investors;
  • Developing multigenerational dexterity for a socially diverse family;
  • Engaging the modern family and its complex planning considerations;
  • Expanding financial, emotional and familial health conversations;
  • Stepping into multigenerational life moments with families; and
  • Planning proactively for the Baby Boomer succession in adviser businesses and the industry.

“Advisers who aren’t proactively building capabilities to address the strategic imperatives and initiate conversations—that are sometimes emotional and difficult—may be in danger of losing connection with clients and their families,” Donath warns. “Advisers need to work across the generations to address these challenges.”

More details about the program are available here.

Additional context for the Fidelity program’s launch can be found in research published by the LIMRA Secure Retirement Institute (SRI), which suggests more than $7 trillion may be inherited by Baby Boomers and younger generations in the next several years. In addition, nearly three-quarters of these investible assets are held in taxable accounts.

According to a survey by financial services firm Edward Jones, 77% of Americans believe that estate and legacy strategies are important for everyone, not just wealthy individuals, yet only 24% of Americans are taking the most basic step of designating beneficiaries for all of their accounts. Of Americans who work with financial advisers, 64% reported never having discussed estate goals and legacy plans with their financial adviser. At the same time, only 34% of Millennials and Generation Xers have discussed their estate/legacy goals with their financial advisers, which increased only minimally for Baby Boomers (38%), the generation most likely to need estate plans in the near future.

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