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Discuss: The Biggest Ruse Ever Perpetuated?

publication date: Jan 30, 2016
author/source: Valuentum Editorial Staff

There is a crisis on Wall Street.

We’re not talking about the “Big Banks” or outrageous CEO pay or loose monetary policy -- we’re talking about the biggest ruse ever perpetuated on individuals, and it is even worse for financial advisors that employ these vehicles. We’re talking about index funds.

Vanguard’s expense ratio on the Vanguard S&P 500 ETF may seem cheap at 0.05% per annum, for example, but let’s be fair. The value that Vanguard brings to the table isn’t much of anything to charge even a sliver of assets. Vanguard doesn’t maintain that index, it doesn’t conduct research on the companies in that index – in many cases, all it does is copy the grouping of stocks.

Who cares about a measly 0.05%, right?

Well, for a retirement portfolio with $1,000,000 in assets, a 0.05% expense ratio, that amounts to $500 a year just to hold the assets, just to mimic an index that someone else created, just to... – you get the point. There’s no research on the 500 companies, there’s no commentary on them, there’s no quest for outperformance, but only to copy the performance -- yet Vanguard can get away with charging $500 on this money? How can this be?

It gets worse, too. As financial advisors use indexing more and more, the asset-under-management (AUM) fees can really add up for the end user. For an advisor that may charge a 0.50% management fee on assets per year, for example, for the assets parked in even the lowest-cost index fund, the bill to an individual with that “million-dollar” portfolio is $5,500 per year! – just to park assets in a “low-cost” index fund! This situation simply can’t last.

From where we stand, even the lowest-cost index funds are far too expensive. The industry has a big problem, and we find it hard to believe individuals will allow this to continue. What do you think? Is $5,500 fair in this example?

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