ETF.com: Are active managers not feeling the pinch to bring fees down? Why are they being able to hold on?
Johnson: There are a number of factors at play. One trend is that the cost of the actual management of many active products has been fairly stationary.
Where there have been cases where active funds have gotten relatively cheaper, it's been to the extent that there are cleaner share classes of those funds that are being introduced. Money is flowing out of them, and ultimately many legacy share classes are being shuttered.
So, you haven't seen a ton of movement in the underlying management costs for active funds.
Part of that is there are pockets of the active universe that have held up relatively well, most noticeably in fixed income, where very successful managers have continued to deliver value and justify their charges. You haven't seen that same degree of scrutiny nor pressure on fees in those cases, which are limited, and I would say mostly reside within the fixed-income sphere.
You move over onto the equity side and active stock funds have been the epicenter of the mass exodus from active strategies, broadly speaking. It's mostly been an issue that's plagued active stock pickers, and most notably active stock pickers that have more of a growth orientation.
ETF.com: There’s also the middle ground now, in the form of strategic beta funds. The asset-weighted average fee for strategic beta is only 0.17%. What role is smart beta playing in this fee compression story?
Johnson: I think it becomes a reference point for fund selectors, and for investors when they say, “I've now got something that was the benchmark I used to gauge your performance, Mr. or Mrs. Active Manager, and now it's an investable alternative, and a very inexpensive one at that.”
It becomes a real competitive threat to many forms of active management. They have a meaningful cost advantage and, at least in the case of taxable money to the extent that they're bolted on to an ETF chassis, they have a meaningful tax efficiency advantage as well.
ETF.com: The study finds that a changing advice model toward fee-based advice has also impacted fund fees. Tell us about that.
Johnson: There we still have very important questions; most notably in my mind: Is the $5.5 billion worth of estimated savings on fund fees in 2018 really accruing to the end investor? Or is that simply being displaced by advice fees as more and more advisors move away from being paid on commission to charging a fee for their services?
It’s almost inevitable they’re going to favor lower fee funds to build portfolios on behalf of their clients to leave more room for the fee they charge for not just portfolio management but other services. In a worst-case scenario, this could simply be charging fees that would otherwise not be paid by the clients.
If they were in the commission-driven model and the advisor simply bought them an A-share with a front-end load and let them hold it unperturbed until they proceeded down the decades-long path between where they invested and funding their retirement, on a net/net basis. it puts the burden back on investors all over again to understand, am I really saving these pennies? Are they being invested and compounding to my benefit? Or am I just simply taking money from one pocket and putting it into another?