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Tuesday, October 23, 2012

High Fees and Low Cost ETFs

If you are a serious investor and don't know who Jason Zweig is, you should.  His book, Your Money and Your Brain, is a must read.  Very well written, it will make every investor better.

Recently he has examined a use of ETFs, When Cheap Funds Cost Too Much,  that overrides one of their  biggest benefits:  low expenses.  As Zweig points out, some advisors use ETF strategists--thereby adding a 3rd layer of fees to the investment process.  There is the advisors's fee, the strategist's fee, and the expenses of the ETF itself.  He points out this can drive costs to between 1% and 3% of portfolio assets.  Included may be a transactions cost incurred when ETF funds are traded.

A broader issue Zweig discusses is that strategists frequently provide performance results that are not real client performance results - they are back-tested results.

All of this can be avoided, and is, by numerous advisors.  I, like some other advisors, for example, index the market, avoid the "middle man" strategist, and use mostly commission-free ETFs.  Performance, in line with the objective,  is going to be close to the benchmark.  For example, here is performance for a typical client (note that it is up-to-date and can be seen by the client anytime she wishes by going online!):

As you can see, performance since inception of the account is within .20% (average cost of ETFs) of the benchmark.  Note that the benchmark is explicitly listed in the footnote.  Each client has a specific benchmark reflective of their risk tolerance.

My fee is .4% to set up the account, manage it on an ongoing basis, and rebalance as necessary - all mystery eliminated voila'. Total cost, all in, is .6%.  If she did it herself, it would be .2%.  As a matter of emphasis, the layers pointed out by Zweig results in the usual opaqueness in fees and costs that Wall Street is adept at creating.

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