Less complexity and less fees: it matters

The reality is twofold in that (a) you don’t have to pay high fees for smart advice but (b) a great many folks are overpaying for investment advice.

Investment advice and portfolio management are not priced like wine. When one purchases wine, it is perceived that the more expensive the wine costs then the better the wine must taste. This has been proven to be untrue in blind taste tests over and over again. Many great wines are available for minimal cost. Similarly, it is unfortunately perceived that higher investment fees equate to better investment performance and a higher level of service. Paying more in the investment world does not equate to actual better results.

The crux of it all is that investors seek perceived value when what they really want is actual value. The more complex an investment product or investment service, the more it is perceived to be offering greater investment value. And, the less complex an investment product is, the more actual value it offers. Think of it like this: The great PhD’s and Nobel Prize-Winning- Laureates at Long Term Capital Management in late 1990’s created a very, very complex investment product of perceived great value that failed (and nearly single-handedly cratered the investment world at the time). Since Long Term Capital Management’s failure, the less complex index fund has proven to produce actual value. The more complicated something is, and the higher fees it has, the more likely it will end up underperforming and being a problem.

And it is not just investment complexity that matters. Fees matters – immensely.

I recently reviewed a portfolio for a prospective client. The current advisor had the client 100% invested in high-fee mutual funds that the advisor’s company managed (think being a client of XYZ Wealth Management and being invested in XYZ funds – as an example). These mutual funds had management fees as high as 2.0% – and 1% of those fees were 12b1 fees (marketing fees that do the client no good) that go DIRECTLY to the advisor’s firm or advisor as compensation for using those funds. On top of the egregiously-high fee mutual funds was the advisor’s separate “management fee” of 1.25% per annum. So, this client was essentially paying 2.25% per year to have their assets mis-managed in under-performing, proprietary mutual fund products. Unfortunately, this situation is way more prevalent than it should be. Folks have access to better investment management services at-or-below 1.0% – they simply need to contact the right people.

Sean Miller is an independent investment advisor located in Charlottesville. He is the right people and can be contacted at 434-825-0000 or sean@millerasset.com