Asset Management Fees: Main Street Investors Force Big Changes on Wall Street

Consumers Are Forcing Epic Change on Wall Street
Consumers Are Forcing Epic Change on Wall Street

Historically, the asset management industry has been merely an easy way for money managers to get rich at your expense.

Even today, 401(k) fees continue to rob us of $60 billion each year -- forcing us to work longer and save more.

Former Sen. Peter Fitzgerald declared the mutual fund industry "the world's largest skimming operation." (A completely legal one, at that.) And Vanguard founder John Bogle argues that "beating the stock and bond markets is a zero-sum game before the intermediation costs, and a loser's game thereafter."

The High Price of Letting a Pro Manage Your Dough

Since the 1970s, Bogle has been calling out Wall Street for its rampant fee transgressions, specifically the costs associated with investing in actively managed mutual funds. These fees pad fund companies' coffers and rob fund clients of higher returns.

Early on, Bogle became a vocal champion of index investing -- pointing out the superior returns individual investors could get by buying into low-cost funds that mimic the movements of a chosen stock market index.

How much better off are consumers who steer their money away from high-fee funds? Consider one of Bogle's examples: After 20 years of taxes, fees, and growth in a typical mutual fund, $1 is worth just $1.70 in real terms. But $1 in a low-cost index fund is worth $4.50. Looked at from another angle, each 1% charged in fees over the course of a career erases more than 15 years of portfolio gains, according to The Wall Street Journal.

And yet for decades, investors -- whether because of intimidation, indifference, or ignorance -- were blind to this, and went along with fund companies' policies.

But today's investors have caught on and are demanding lower fees. It's a move that's forcing asset managers to continue lowering prices to attract assets.

Wall Street is Losing the Staring Contest

On Sept. 10, BlackRock lowered fees on its iShares exchange-traded funds. A week later, Schwab lowered its fees.

On Oct. 2, Vanguard followed suit, lowering its even further. And on Oct. 15, BlackRock announced it would lower fees on its iShares funds yet once more.

Part of this is corporate competition. You see, Vanguard -- well-known as the low-cost leader -- "attracted more money from investors in the first nine months of 2012 than ... in any full calendar year in its 38-year history," according to Bloomberg. With nearly $2 trillion under management, Vanguard has proven extremely popular due to its low-cost strategy, something its competitors have undoubtedly noticed.

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Of course, the fees can only be cut so much. It's doubtful asset management companies would drop fees to zero -- except perhaps as a short-term gimmick to attract assets.

And yet, however you slice it, investors are the clear winners in this battle. As costs continue to fall, they lose less money in fees.

It also makes passive investment vehicles (ETFs and index funds) much more attractive than actively managed mutual funds (which often have fees well over 1% annually).

And this means that actively managed mutual funds may soon be forced to drastically cut their fees just to remain competitive in the marketplace -- a move that would return additional billions of dollars to investors' pockets every year.

It's nice to see Main Street dealt a winning hand every once in a while.

This article was written by Motley Fool analyst Adam J. Wiederman. Click here to read Adam's free report on tips to maximize your Social Security payout.