Investment Help

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Saturday, October 2, 2010

Still Paying 1st Class For Coach?

Most individuals who use advisors pay outrageous fees for investment management- and yet the historical evidence clearly shows that at least 8 out of 10 under-perform the market. Individuals are paying 1st class rates and sitting in coach. Some don't even know their performance. I know because I ask them. Just as important, they have no idea what Wall Street, and its many layers, are siphoning off from their asset performance --much of it deftly hidden. Fees are taken before results are reported,, and then many advisors automatically deduct their charges.

Take for example, an advisor who invests your assets in mutual funds. What kind of costs are involved? Consider the following chart from Bernstein, "The Investor's Manifesto:"

CLICK TO ENLARGE As shown, even the most basic large cap active fund has fees that average 2.2%. This is before your advisor takes his cut of 1 to 2%! Don't be surprised 20 years from now if you've severely underperformed. But then, hey, who knows? Maybe you'll get lucky and have the 1 out of 10 or 2 out 10 managers who outperform. But there is a way to get into 1st class; and it's straightforward, it doesn't take a lot of time, and, best of all, it helps you get a fix on exactly what is happening with your investable assets. On the basis of historical performance data, it puts you into 1st class. It uses a low cost, low turnover, indexed portfolio, well-diversified portfolio.

Yesterday's post reported on the version reported by BlackRock that provides long-term performance data. The year-to-date performance of the low cost, low turn-over, well-diversified portfolio was 5.47%. Again, do you know what your performance was? The cost of the portfolio is 0.22% and uses sectors of the market that Bernstein's table shows charges over 4%!

Furthermore, this week's posts showed that it is not that difficult to get solid, lost-cost performance with your investable assets. Something worth thinking about: this is an area where you can go 1st class and pay coach pricing.


  1. You're preaching to the choir with me on this one. The best predictor of future performance is expense ratios, the lower the better.

  2. But what you may not appreciate is that it is very difficult to get across to people. Sometimes I think many people don't mind being sheared as long as they are not bothered to think. But In guess that's the case i9n a lot of areas besides their life savings!

  3. I think they don't mind being sheared as long as they believe they are going to beat the market. As a modern day Mr. Micawber might say: "Annual performance better than the market, result happiness. Annual performance worse than the market, result misery."

  4. What a great analogy. Philosophically, I think this is the very basis that many DIYers have (versus just being cheap). It's about the value (or lack thereof) that many investors find with advisers. They are a big rip for many.

  5. Robert,

    This is a great post.

    But here are my 2 cents worth. After seeing more than 40 different investment accounts, if my informal assessment of just 40 or so is any indication, your "80% underperforming the market" is way off. No where near 20% outperform the market. That number might apply for pre-tax, pre-survivorship bias actively managed mutual fund numbers, compared to counterpart indexes, but you're selling your point far far too short. Have a close look at the accounts that come your way Robert. You'll find that most advisors chase performance and do terribly. I have not seen a single 5 year performance from an advisor (out of just 40, mind you) that has kept pace with a diversified portfolio of ETFs. Not one. Not yet.