Practical Applications For Financial Planners

Given that index management has outperformed active management in most U.S. asset classes, financial planners can use index funds to improve their clients' pre-tax and after-tax performance, in addition to lowering portfolio expenses. (Please see Table 2.7, which contains the average expense ratios for the U.S. Large-Cap, Mid-Cap, Small-Cap, International Large-Cap and International Mid/Small-Cap asset classes.) For example, while the average expense ratio in the actively managed Large-Cap Blend asset class is 1.35 percent, diversified index funds managed by high-quality organizations can be accessed with expense ratios as little as .09 percent. Financial planners with clients in higher marginal tax brackets may also find that tax-managed index funds or separate accounts are attractive alternatives. While tax-managed index funds and separate accounts typically possess higher investment minimums (for example, $10,000-$1 million) as well as modestly higher expense ratios than typical index funds, many of these vehicles have successfully avoided capital gains distributions through active tax-loss harvesting.

TABLE 2.7 Average Net Expense Ratios for U.S. and International Asset Classes (Funds with minimum investment levels less than $1 million)

Active Mgmt Index Mgmt. Index Mgmt. Category Category Lowest 10th

Average Average Percentile

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