If you follow our blogs, you know that we don’t believe there is any reason to invest using mutual funds.  In fact, we would go so far as to say that owning a mutual fund is akin to owning a land-line based home phone.  There is no real reason to do so, just inertia.

With the advent of new index based products and increased automation, Main Street is beginning to receive the same access, benefits and pricing previously reserved for institutional investors.  Much of this can be attributed to the greater use of financial technology and the proliferation of Index Funds or ETFs (Exchange Traded Funds). Between the two, there are greater levels of efficiency and competition amongst asset managers these days. At SWS Partners, we view technology enhancements and product improvements as favorable ways to improve outcomes for investors who don’t qualify as institutional.

It’s important to define who is considered an institutional investor; they are generally corporations, public pension plans, endowments, foundations, and the ultra-wealthy. Because the portfolios of these investors are often in excess of hundreds of millions if not billions of dollars, they enjoyed the benefit of intense competition amongst asset managers for the right to invest their capital. Historically, this meant better products, lower costs, and access to the brightest minds on Wall Street. Comparatively, a typical retail investor was left with stodgy mutual funds that have higher transaction fees and operating expenses, while having access to inferior research. This left retail investors at a distinct disadvantage in their ability to create long-term wealth.

We think that much of this exclusivity has been shattered primarily because of financial technology and product improvements. The former has created broad efficiencies within the entire spectrum of asset management, from security selection to risk management, and has also created far greater transparency for the retail client. On the other hand, the product improvements introduced by ETFs have created an intense erosion of fees. The latest example of this is Fidelity’s new no-fee index funds.  There is much academic and empirical evidence to suggest that limiting fees is one of the more viable components of long-term wealth creation, so we are thrilled to see a level playing field for everyday investors.

An ancillary benefit of these trends is that we’re seeing asset managers compete in a new way: by making higher quality research more accessible. In fact, the problem now is not so much the lack of good research available, but rather the ability to process all of it effectively. This is a pretty good problem to have but nonetheless requires that a financial planner is diligent and organized in order to help clients implement the best ideas into their portfolios.

In sum, financial technology and product improvements are democratizing asset management, enabling virtually any investor to incorporate good ideas into their portfolio in an efficient manner. While some disparities still exist, the gap is narrowing for institutional and retail investors.  The genie now appears to be out of the bottle and we foresee these trends continuing to level the investing playing field.