I have quite a few conversations with a retired federal empIoyee that revolve around his investments, conversations usually instigated by my friend. He uses Morgan Stanley and the suggestion was made by a M-S employee to change from Putnam funds to a Black Rock fund. I explained to him that the Black Rock funds in his federal retirement program had extremely low ERs but not so for personal accounts. The average for personal accounts is an ER of 1.3%, I believe. I looked this up on Morngingstar a few weeks ago so I could be off a little bit.
He states they do not charge for AUM nor does he buy any funds with loads. Many funds can be bought without a commision. He doesn't buy funds with commissions or loads.
After talking to me and conferring with a like minded Boglehead type, he did ask his advisor/broker why she moved him into a Black Rock balanced actively managed fund that has an ER of 1.8% vs. what I quoted as the typical ER of a Vanguard index fund. She also took him out of Putnam funds into the Black Rock funds.
She answered to him that these ERs are figured differently for different funds. She also warned him about the changing of index used by Vanguard for some of their index funds, as if that was a negative. Both ideas are patently non-sensical, and typical of the kind of advisors Bogleheads have been warned about.
A sticking point for my friend is how so many companies can be in business all these years with high ERs? I explained to him how poor performing funds disappear creating seclection bias. We also discussed advertising, commisions to brokers/advisors. Maybe some running 401Ks have low incentives to improve lower ERs, also very large pension funds can get better rates and the MF companies make money on the volume.
My buddy is trying to figure out if it is worth it to change to low cost Vanguard funds and admit to himself that he was foolish for all these years.
I explained that he was never foolish, he is just making adjustments to improve his game.
This friend is handling his own funds and those of several of his relatives. He appears to be doing a good job with the exception of paying higher ERs than most people on this board pay. He is also helping young relatives with disabilities continue to work and to get out of jams that have cost them money. I admire his dedication and selflessness in these endeavors.
Can you think of any additional reasons why high ER funds survive?
How does Morgan Stanley make their money if one buys funds without commissions or loads and they are not charging for assets under management or hourly charges?