Wes Moss: Main Street investors finally get a break

Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB.

Wes Moss hosts 'Money Matters' Sunday mornings on AM750 and 95.5FM News/Talk WSB.

There is a new race to the bottom on Wall Street, and for once that’s a good thing. Charles Schwab last week said it is going to lower the expense ratios on its ETFs — exchange-traded funds, similar to mutual funds — which are already low to begin with. This announcement comes a few weeks after Blackrock, the parent company of iShares, said it plans to make strategic expense cuts on some of its ETFs.

Schwab and Blackrock are slashing fees in an effort to remain cost competitive against Vanguard, which is the low-cost leader in the ETF marketplace. This is great news for investors for two reasons. Most obviously, lower fees will boost portfolio performance by allowing investors to keep more of what they earn.

But perhaps more importantly, the downward pressure on ETF fees will actually help investors make better choices. As fees settle at a similar low rate, cost is eliminated as a selection criteria, leaving investors free to base their decisions on which ETF best tracks a particular index or represents a particular investment theme or industry sector. There are a variety of sources for this kind of information, including Morningstar.com, which is largely free and one of my favorites.

A new breed of investors: ‘ETF strategists’

But with more than 1,000 ETFs available, making the right choice can be daunting. Investors who want help harness the power of ETFs can work with one of the about 50 U.S. firms that specialize and focus on using only ETFs to build investment portfolios. This relatively new breed of investors are labeled “ETF strategists.” They typically build several model-based portfolios using ETFs for investors to choose from, rather than building custom portfolios for every single client.

This allows ETF strategy firms to keep the cost of implementing a strategy and research at a very low level, even when managing “non-multimillion dollar” accounts. In theory, this should bring professional strategy, management and low cost together for “every-day investors”, now referred to in financial jargon as the “mass affluent.” These are investors with between $50,000 and $500,000 to invest and, as a group, are increasingly ignored by large Wall Street investment firms looking for “high” and “ultra-high net worth” investors (those with more than $1 million in investable assets).

I see ETF strategy firms as big competition for the traditional mutual fund industry. But I do see these firms playing an important role in the coming decades by helping millions of baby boomers headed into retirement.

(In full disclosure, in addition to my role at Capital Investment Advisers, I am a partner at Wela Strategies, one of Atlanta’s first ETF strategy firms.)

Have you considered switching to ETFs? What would you define as the “mass affluent”?

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– Wes Moss, for AJC Atlanta Bargain Hunter blog

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