Advisors and the financial services industry talk a lot about fee transparency and how far we’ve moved the needle in educating investors about the “price of advice.” But the stark reality is confusion is still rampant, even among investors working with an advisor. While this may raise eyebrows in some financial circles, it shouldn’t.

Recent findings from State Street Global Advisors’ Low-Cost Investing Survey suggest confusion surrounding fees continues to persist despite industry efforts to enhance disclosure by arming investors with more information about expenses. Clearly, disclosure alone is insufficient. More work needs to be done to improve investors understanding of fees and their impact on investment returns, especially as the industry experiences an influx of NextGen investors entering the market for the first time.

According to the aforementioned survey, an overwhelming majority of investors are at least aware of what expense ratios are (87%) and what basis points are (83%). However less than one-third say they understand each “completely.”

Furthermore, comprehension of investment product fees—and fees in general—is low even among those working with an advisor:
• Nearly half (47%) of investors believe the management costs of investments like mutual funds and ETFs are already included in the fee they pay their advisors or investment platform. Notably, investors currently working with an advisor (60 percent) are more likely to agree with this, versus 37% of self-directed investors.

• The younger the investor, the more likely they are to agree with this false statement: 71% of millennials agree versus 51% in Generation X and 36% of boomers, who presumably have had more investment experience over their lifetime.

There also seems to be a limited understanding of just how “low” low-cost actually is when it comes to fund expenses. Among those who think they understand expense ratio and/or basis points, the average expense ratio they consider to be no longer “low cost” is 0.61%. That’s higher than the asset-weighted average expense ratio of U.S. open-end mutual funds, which is 0.51%, and the average asset-weighted ETF cost at just 0.20%.

While it’s unfortunate that investor comprehension of fees is still low, despite all the headline news of the financial industry’s “race to zero” and the growing popularity of low-cost investments, it’s short-sighted to choose an investment solely on the basis of cost. Like any other major purchase, one must look beyond the sticker price to know what you’re getting for what you’re paying.

One of the unintended consequences of increasing fee compression across the ETF industry is that by comparing costs by focusing exclusively on a single data point—the expense ratio- many investors may be inadvertently deprioritizing other key factors including risk, volatility, tax efficiency as well as impact on portfolio diversification.

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