Don’t Miss The Forest For The Fees

Dec 31, 2018

When it comes to investment advice, you have to decide if you are purchasing a commodity or a specialty item.  

A commodity is something usually uniform in quality between companies that produce or sell it. You cannot tell the difference between one firm's product and another. When dealing with a commodity, price is the only thing that can differentiate. It becomes all important. Why buy a bag of sugar for $2 when I can buy the same bag for $1?

A specialty item, by definition, is special. You can’t just get it anywhere. The quantity is limited, therefore the price (usually) is higher.

The financial services industry can be divided into two different camps – they represent two different sets of target clients.

Let’s call the first group DIY (do it yourself). DIY financial services firms are like Lowe’s or Home Depot. They promote the idea that you can do certain projects (home or financial) yourself just as well as anyone else can … and save money by doing so. So, price comes up over and over again in their marketing.

DIY financial firms promote the idea that all investments boil down to a few basic elements than can be easily understood and manipulated. Therefore, low price and ease of service (cool websites, mobile apps, etc) become paramount. Advisors, in this world, represent additional expense for no value in return. After all…you can do it yourself.

The second segment of the financial services world is the DIWH (do it with help) crowd. Some of these firms employ salesmen who sell their products. Others promote their services through advisors, but usually do not pay the advisor. They let the advisor negotiate their fee directly with their own clientele, and simply provide their products to the public through the advisor.

Neither approach is right or wrong, but they are fundamentally different and (I believe) are for fundamentally different people.

It is mathematically true that fees can erode the performance of an account over time. But I think real life tells another story.

If an investor or a retiree today is in bad shape today, it is likely not because they have paid high fees.

They are in bad shape today because they (a) failed to start early enough; (b) failed to save enough; (c) failed to have an investment plan, rather they had a collection of investments they were either sold or which they bought because they read an interesting blog post; (d) they sold out when they were scared; (e) they kept buying when they shouldn’t have because “this time it’s different”; (f) they bought when everyone else was buying and sold when everyone else was selling – they followed the crowd.  

In my experience, a mediocre investment with higher fees combined with good discipline (good investor behavior) will far outperform the best performing investment with the lowest fees in the hands of an undisciplined investor.

Don’t be so focused on the gnat of fees that you let the elephant of bad behavior step on you.

Pick the advisor you like and pay the price. See the big picture. Don’t miss the forest for the fees.