After a technology breakthrough makes it clear that a new approach is faster, cheaper and more reliable, many people stick with the old way. Until they don’t. – Seth Godin
Earlier this week I wrote about the new “cost matters consensus” which through a turn-of-phrase was meant to highlight the growing consensus that investment-related costs have a paramount effect on investor returns. The cost matters hypothesis is not much more than a little bit of math, a smidgen of logic and common sense.
That being said it takes awhile for the consensus to come around as Seth Godin writes. In this case low cost, indexed exchange traded funds or ETFs represent the “technology breakthrough.” For Blackberry the breakthrough was the Apple iPhone and its screen-based keyboard. Blackberry is still committed to physical keyboard. Again it takes awhile for a new technology to completely push aside the prior version.
The same is the case with mutual funds. At year-end 2015, the ICI notes that the mutual fund industry still manages $15.651 trillion vs. $2.100 trillion for exchange traded funds. However the writing is on the wall. In a piece at Mutual Fund Observer David Snowball chronicles the downward spiral facing mutual fund companies peddling, by and large, actively managed high cost funds.
Mutual funds are not the asset class that is facing downward fee pressure. But it certainly is the one where individual investors have the bulk of their assets. Godin notes the inevitable flip’ is elusive, in part because despite the evidence it requires us to abandon a certain world view. He writes:
We’re bad at admitting we were wrong. Bad at giving up one view of the world to embrace the other. Mostly, we’re bad at abandoning our peers, our habits and our view of ourselves.
The elusive ‘flip’ in the high-fee, complexity-laden financial world hasn’t happened yet. However a better technology/idea is out there. The ‘flip’ is coming…