Investment Management Fees Are (Much) Higher Than You Think

[rocketdog]

It's worse than we thought.  Yet another nail in the coffin for active management...

http://blogs.cfainstitute.org/investor/ ... you-think/

[charliemckelvey]

Sorry but that article is just ridiculous.  I follow the logic he presents with trying to build a case that active management fees are high.  Based on that however, we should all invest in some index fund at Vanguard.  That is actually the philosophy of a lot of people which seems to work just fine in up-years, until a 2008/2009 happens and you lose over 50% of your total assets in your passively managed index fund.  Are you still so happy about paying nothing in fees?  Wouldn't it have been better to have someone on your retirement castle wall to move your assets to safety?

[MomTo2Boys]

Wouldn't it have been better to have someone on your retirement castle wall to move your assets to safety?

I need to go get me some popcorn and sit down on a nice comfy couch so I can enjoy where this thread is certain to go from here.

[AdamA]

Sorry but that article is just ridiculous.  I follow the logic he presents with trying to build a case that active management fees are high.  Based on that however, we should all invest in some index fund at Vanguard.  That is actually the philosophy of a lot of people which seems to work just fine in up-years, until a 2008/2009 happens and you lose over 50% of your total assets in your passively managed index fund.  Are you still so happy about paying nothing in fees?  Wouldn't it have been better to have someone on your retirement castle wall to move your assets to safety?

Did actively managed funds do better in 2008/09?

[BearBones]

Based on that however, we should all invest in some index fund at Vanguard.  That is actually the philosophy of a lot of people which seems to work just fine in up-years, until a 2008/2009 happens and you lose over 50% of your total assets in your passively managed index fund.  Are you still so happy about paying nothing in fees?  Wouldn't it have been better to have someone on your retirement castle wall to move your assets to safety?

Oh, this will be fun indeed... Want to present some well constructed, objective data to suggest that active management consistently beats passive? Please also copy your post on the Bogleheads forum (whence came many of us here) if you are confident in your position and want to get at least 26426 eager, naive new clients. I'm with MomTo2Boys. My popcorn is popping and I am melting the (pastured) butter as we speak...
http://www.bogleheads.org

[moda0306]

I think stressing the importance of index funds is far secondary to that of actually having a diversified portfolio.

I don't think anyone is suggesting that if you have index funds, by definition, you have a good portfolio.

At least I hope not.

[BearBones]

I think stressing the importance of index funds is far secondary to that of actually having a diversified portfolio.

I don't think anyone is suggesting that if you have index funds, by definition, you have a good portfolio.

True. In my read, the assertion (seemingly being challenged by charliemckelvey) is that a diversified portfolio of index funds and passive ETFs (such as used in most of the PP constructions and most/all of the Bogleheads portfolios) cannot be consistently beat by active management, at least not enough to cover 0.5-1% in management fees.

[MediumTex]

Charliemckelvey makes his living as an investment advisor--i.e., his livelihood depends on active management.

I'm not yet sure how much he knows about the Permanent Portfolio or the level of investment knowledge people here tend to have (he only has five posts).  I also don't know if he is here just trolling for new clients or if he really has an interest in learning more about the Permanent Portfolio.

This discussion reminds me of the line about the futility of trying to explain something to someone whose livelihood depends on not understanding it.

[Pointedstick]

Charlie, have you read about this neat thing called the Permanent Portfolio? You might want to check it out; it's really super. We have have a forum where we discuss it at http://gyroscopicinvesting.com/

[charliemckelvey]

Wow...  This site is awesome!!!  Most of the forums I have joined the members are mildly engaged.  You guys are an active rowdy bunch.  Pop the popcorn I say!    Let me respond to some of the comments...

Yes, I am an investment advisor with a firm that actively manages client assets so I am biased when I read an article that denigrates the services my firm offers.

No, I am not here to sell anything to anyone.  I just joined and I am here to learn about the PP strategy.

Regarding the article, to clarify where I am coming from...  In my business, in terms of potential prospects that we meet, in terms of reviewing their portfolios, the worst case scenarios are the prospects that hold the philosophy of "I want the lowest possible fees".  These are the ones that have never sought any professional advice and have invested their assets on their own.  Many times these clients come from Vanguard or large banks and invest their entire portfolio in index funds due to the miniscule operating expense.  They then set the portfolio in cruise control and go about their daily lives.  Enter 2008/2009...  They've heard the market has been doing poorly but they are still comfortable knowing they are in an index fund with a very large and popular firm.  By the time they put their hands back on the wheel, close to 30-40 percent of their retirement savings has evaporated!  They watch in horror as the market continues to slide.  They panic and sell close to the bottom fearing they will lose everything.  They then sit on the beach for a year or two, afraid to go back into the water since they have been bitten so badly.  They miss most of the upswing and then finally realize they need professional help.

[Pointedstick]

Many times these clients come from Vanguard or large banks and invest their entire portfolio in index funds due to the miniscule operating expense.  They then set the portfolio in cruise control and go about their daily lives.  Enter 2008/2009...  They've heard the market has been doing poorly but they are still comfortable knowing they are in an index fund with a very large and popular firm.  By the time they put their hands back on the wheel, close to 30-40 percent of their retirement savings has evaporated!  They watch in horror as the market continues to slide.  They panic and sell close to the bottom fearing they will lose everything.  They then sit on the beach for a year or two, afraid to go back into the water since they have been bitten so badly.  They miss most of the upswing and then finally realize they need professional help.

It sounds like you're arguing against a 100% stock portfolio more than you're arguing against a portfolio full of index funds. There are many funds and ETFs that track things other than stock indices.

[l82start]

Regarding the article, to clarify where I am coming from...  In my business, in terms of potential prospects that we meet, in terms of reviewing their portfolios, the worst case scenarios are the prospects that hold the philosophy of "I want the lowest possible fees".  These are the ones that have never sought any professional advice and have invested their assets on their own.  Many times these clients come from Vanguard or large banks and invest their entire portfolio in index funds due to the miniscule operating expense.  They then set the portfolio in cruise control and go about their daily lives.  Enter 2008/2009...  They've heard the market has been doing poorly but they are still comfortable knowing they are in an index fund with a very large and popular firm.  By the time they put their hands back on the wheel, close to 30-40 percent of their retirement savings has evaporated!  They watch in horror as the market continues to slide.  They panic and sell close to the bottom fearing they will lose everything.  They then sit on the beach for a year or two, afraid to go back into the water since they have been bitten so badly.  They miss most of the upswing and then finally realize they need professional help.

this may very well describe a large number of do it yourself investors, i think you will find that the PP investors on this forum have and almost OCD approach to being "informed"  DYS investors, some because they went through a similar experience and began to see the value of diversifying across economic conditions in addition to the advantages of cutting fees to improve gains,

[charliemckelvey]

No doubt.  All of you here are light years ahead of the average investor.  You have to understand that the general public is literally clueless about investing and the stock market.  It is very easy to critique others when you have years of experience in something.  This is why I am critical when I read an article like the one posted here.  It encourages people that they shouldn't pay for professional advice.  Now most of you here on this forum sound like you are capable and experienced to navigate the waters on your own.  The average investor though is not and they typically don't realize it until their ship has half-sunk.

[MediumTex]

Great posts Charlie.

Thanks.

[dualstow]

At least, I agree with this quote near the end of the article.

Price is surely not everything, but just as surely, when analyzed as incremental fees for incremental returns, investment management fees are not “almost nothing.”?

[l82start]

i think most of us would argue the natural progression is from "literally clueless investor" who needs or seeks help, to DYS experimenter, to slightly better informed index investor, to well informed diversified investor using a PP or one of the other simple investment plans.  Not everybody discovers the reality's of investing in exactly that order of course, but  the arguments for cutting costs, using indexes over trying to beat markets, diversifying for economic conditions and others that support this kind of investing are not easily ignored once learned.

[Greg]

i think most of us would argue the natural progression is from "literally clueless investor" who needs or seeks help, to DYS experimenter, to slightly better informed index investor, to well informed diversified investor using a PP or one of the other simple investment plans.  Not everybody discovers the reality's of investing in exactly that order of course, but  the arguments for cutting costs, using indexes over trying to beat markets, diversifying for economic conditions and others that support this kind of investing are not easily ignored once learned.

I look at investing as with many things, you get out what you put in.

I originally started around 1.5 years ago (I was just turning 24 then) with active mutual funds because that is what my father had been using for years. He used things such as Fidelity Contrafund or Low-Price Stock because he's had them for years and low-cost ETFs weren't really around when he started investing in the 80's.

Since I was new to it, I just went along with his investing methods. It wasn't until I started really delving in deep into my investments and trying to chase returns that I found PRPFX. From here, this was a hybrid of the PP method and active management. After a whiles, I realized I wasn't super good at picking and choosing and that emotions could hit me for bad times to buy and sell.

I figured I'd be able to do better emotionally if I left active management and went fully into the PP. It was lower risk and I really liked the thought of investing on economic scenarios versus the MACD or 50 day moving average, etc.

That being said, it took a long time for me to discover the Permanent Portfolio (and consequently this forum which I love so dearly). Most people just don't really ever care to look or don't know how to look for other methods and that's where I feel active management can help. I might not believe in it, but it is filling a vital niche for keeping markets trading and a way for people who don't know anything about investing to branch out.

[Pointedstick]

The quandary that results when a clueless person hires an active manager is that of how to know whether the hired professional is actually doing his job properly. If you're truly clueless at investing, then you don't possess the skills to determine if your active manager has actually beaten the market, preserved your capital, minimized taxes, or accomplished any of the other tasks you may have hired him or her for.

To a certain extent, this is an issue with every task outsourced due to ignorance; if you have no knowledge of the task, how are you to judge the services of any professionals or assess their competence? But once you start to accumulate such knowledge, even for the purpose of evaluating the professionals, you become more and more capable of simply doing the task yourself.

For these reasons, I believe that in general, the optimal solution to ignorance is self-education, not paying others to make up for your incompetence for a fee.

[BearBones]

No doubt.  All of you here are light years ahead of the average investor.  You have to understand that the general public is literally clueless about investing and the stock market.  It is very easy to critique others when you have years of experience in something.  This is why I am critical when I read an article like the one posted here.  It encourages people that they shouldn't pay for professional advice.  Now most of you here on this forum sound like you are capable and experienced to navigate the waters on your own.  The average investor though is not and they typically don't realize it until their ship has half-sunk.

I definitely see where you are coming from, Charlile. And there is certainly a benefit from emotional detachment to one's portfolio. That is worth paying for if you cannot do it yourself.

However, what you may find here is that many/most professional advisors are also clueless, biased by conventional "wisdom," a limited understanding of economics and monetary policy, and a very short historical time horizon. They make a lot of assumptions about economic behavior that may not come to fruition.

What I have learned the most from this forum (and Bogleheads) is that there are a lot of people out there who know a hell a lot more than I do (and probably more than most professionals do). I've given up on trying to outsmart anyone, outsmart the fed, or outsmart the market as a whole.

[charliemckelvey]

The quandary that results when a clueless person hires an active manager is that of how to know whether the hired professional is actually doing his job properly. If you're truly clueless at investing, then you don't possess the skills to determine if your active manager has actually beaten the market, preserved your capital, minimized taxes, or accomplished any of the other tasks you may have hired him or her for.

To a certain extent, this is an issue with every task outsourced due to ignorance; if you have no knowledge of the task, how are you to judge the services of any professionals or assess their competence? But once you start to accumulate such knowledge, even for the purpose of evaluating the professionals, you become more and more capable of simply doing the task yourself.

For these reasons, I believe that in general, the optimal solution to ignorance is self-education, not paying others to make up for your incompetence for a fee.

Let me share with you an experience that has stuck with me...  I have a friend who is just like you described, he prefers to do everything on his own.  I used to admire his tenacity and dedication to tackling new projects and obtaining new skills.  Then I watched him take on the endeavor of building a house.  He had to sub-out some of the work but he was intimately and actively involved in all facets of the construction.  He wanted to do as much of it on his own as possible and he definitely acquired many new skills.  Construction of course was stalled over and over again as a result.  To make a long story short...  That house took a few years to construct and several years of projects thereafter and it is still not done since he can only work on it in the evening and on weekends.  When you add everything up, yes, he saved lots of money but at a cost of approx. 10 years of his life!

Now investing and building a house are obviously two completely different things but you get my point.  Sometimes it is better to pay a professional and save yourself the time, aggravation, and learning the hard way.

BTW, this is not applicable to anybody on this board. 

[charliemckelvey]

No doubt.  All of you here are light years ahead of the average investor.  You have to understand that the general public is literally clueless about investing and the stock market.  It is very easy to critique others when you have years of experience in something.  This is why I am critical when I read an article like the one posted here.  It encourages people that they shouldn't pay for professional advice.  Now most of you here on this forum sound like you are capable and experienced to navigate the waters on your own.  The average investor though is not and they typically don't realize it until their ship has half-sunk.

I definitely see where you are coming from, Charlile. And there is certainly a benefit from emotional detachment to one's portfolio. That is worth paying for if you cannot do it yourself.

However, what you may find here is that many/most professional advisors are also clueless, biased by conventional "wisdom," a limited understanding of economics and monetary policy, and a very short historical time horizon. They make a lot of assumptions about economic behavior that may not come to fruition.

What I have learned the most from this forum (and Bogleheads) is that there are a lot of people out there who know a hell a lot more than I do (and probably more than most professionals do). I've given up on trying to outsmart anyone, outsmart the fed, or outsmart the market as a whole.

Both you and Pointedstick make valid points.  As with any profession, you have advisors that are absolutely fantastic and some that are not-so-fantastic.  I am now stepping off this soap box before any tomatoes start flying...

[melveyr]

I see a good investment advisor as functioning like a personal trainer.

I know how to do push ups. I know what food is good for me. I know how to run. But I still am not nearly as healthy as my knowledge would allow me to be because I am not disciplined in terms of exercise. So, if I had the money I would probably benefit from a personal trainer.

With investments, I happen to have the combination of knowledge and discipline that allows me to do it entirely on my own. However, if someone was lacking in either regard, they would like benefit from professional help.

In practice however, most investment advisors are salesmen who honestly don't know very much about finance. They have a rolodex of folksy anecdotes and Warren Buffet quotes they can whip at any given time, but not much brain power or philosophical framework behind it. They churn clients accounts so they always include the mutual funds that did the best in the past, confusing their clients into thinking those were returns they earned or will earn in the future. This is the dishonest part and IMO it has a huge impact on results, and the clients are too ignorant to know that it is happening otherwise they would be managing their own money in the first place.

[moda0306]

I think there can be a role for a financial professional in someones life for the following purposes:

- Hold people accountable to saving.
- Make sure they're using the right tax-vehicles to accumulate and distribute wealth
- Make sure they have the right protection in the forms of insurance (disability, life, and ltc if it makes sense). This may seem unrelated but people's inherent ability to insure bullshit while leaving huge exposures uncovered astounds me.  Also, making sure they have the proper wills and legal stuff in place is helpful.
- Keep them diversified.

Some people simply are not interested in taking these things upon themselves, even if they could. I love cars and I still wouldn't touch auto maintenance with a 20 foot pole.

[Pointedstick]

There can be great value in paying someone to teach you. But I believe that there is seldom much value in paying someone to avoid having to learn.

[moda0306]

There can be great value in paying someone to teach you. But I believe that there is seldom much value in paying someone to avoid having to learn.

Ps,

You and I are similarly interested in money, Econ, tax scheming, investing, etc, so it's hard for us to imagine, but people have only so many hours in a day to learn how to do various potentially complex things. I think what you're trying to say becomes about 10x more relevant when you look at how inept most advisors are, which you laid out perfectly in a previous post.