“I don’t see how you cannot join the party,” Paul Ellenbogen, Morningstar’s head of global regulatory solutions, told the Financial Times. “It is not a defensible position to say, ‘I will be the high priced ETF.’ You can be the fancy hotel or the $300 bottle of wine, but there isn’t a marketable position for the high-priced ETF producer. It is kind of an oxymoron.”
Looking ahead, once the DOL rules are in effect, financial advisors may shift to low-cost, passive vehicles like index-based ETFs from traditional mutual funds.
According to Morningstar data, median fees for institutional class shares of actively managed large-cap stock and intermediate-term bond funds are 75 basis points and 50 basis points compared to the respective passive ETFs with a 30 basis point and 23 basis point expense ratio.
“An index fund won’t by definition underperform or outperform and the low cost accelerates the defensibility of the choice if you are looking at being sued under the new rules for not acting in the best interest of clients,” Ellenbogen added. “It is another hit. It is not as if actively managed funds were doing great before and [the new DOL rules]came along. This just puts more pressure on them.”
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