CAPITAL IDEAS: If you think you’re good at investing, you’re probably losing more to fees


Generally speaking, people are bad at investing, but think they are good. It is not unlike when you ask 100 people if they are a better-than-average driver or more reasonable than the average person; 99 of those people say, “Yeah, I’m better than average.” You get the same answer when you ask investors if they are better than average, even though they probably are not.

When it comes to investing, the math backs up that social experiment. Other than a blip here or there, numerous studies by organizations like Dalbar and MorningStar report that individual and paid investors tend to underperform their respective return benchmarks over time.

My intention is not to bash the skillset of other investors, nor is it to be self-deprecating (I am, after all, an investor like you). Instead, I want to draw your attention to the fees you are paying, whether you know it or not.

Yes, I said, “whether you know it or not.” It is not uncommon for firms like mine, Berkshire Money Management (BMM), to speak with prospective clients looking to change advisors. Often, those prospective clients share, “My current advisor doesn’t charge me anything.” Then I roll my eyes (internally), not at the investor, but because of the likely lack of fee transparency from the advisor.

The not-so-well-kept secret is that most of the financial services industry is comprised of for-profit businesses. So, while an investor may not see a fee explicitly written out on the monthly account statement like BMM does, there is usually a fee. Even when the fee is written out, even the most straightforward statements can be confusing, making even the itemized fees seem unobvious.

Frequently, fees are not in the statements or even clearly disclosed in the signing documents. Sometimes, the share price of the investments is adjusted to benefit the financial organization, so you never actually see the transaction. (And, yes, that is legal.) Often, those fees are buried in the disclosures and written in legalese, so it is still hidden from you. However, regulators are getting better at forcing financial firms to use plain English and fining firms for misleading clients through “hidden” disclosures.

There are two central regulatory bodies for financial advisors in the United States. Some firms, like Berkshire Money Management, are “fiduciaries” and must act in the best interest of the client. They are regulated by the Securities and Exchange Commission (SEC).

Other firms have a lower standard of providing investment advice. Those firms are regulated by the Financial Industry Regulatory Authority (FINRA). FINRA recently released a study titled “How Much Are You Paying? What You Know (Or Think You Know) About Investing May Play a Role in How Much You Pay in Investment Fees.” The study included responses from 4,800 people who had investments beyond assets in retirement accounts. Examples of “retirement accounts” are 401(k)s and Individual Retirement Accounts (IRAs).

Investors in the FINRA study self-assessed their aptitude and then took a 10-question test to objectively measure their skill sets. The report found that “investors with higher levels of objectively measured investing knowledge report paying lower fees relative to those with lower levels of objectively measured investing knowledge. However, investors with higher self-assessed investing knowledge tend to pay higher fees than those with lower self-assessed investing knowledge.” In other words, people who self-assessed themselves as being better investors paid more in fees.

FINRA cites cost transparency as one factor that blocks investors from making good fee choices. FINRA also pointed out the decision-making process of investors as a reason why fees are often high for investors who self-assess themselves as highly skilled. Citing a previous study (Beshears et al., 2009), investors tend to focus primarily on historical returns in selecting an investment and ignore the costs. As better-versed investors know, past performance is not only not a guarantee of future returns; significant gains are often a signal to expect lower returns as prices typically experience a reversion to the mean.

Advisor’s value you can achieve on your own (with some help)

There’s more to investing than fees and investment selection. Not to suggest you need a financial advisor for investing, because you don’t. Still, there are prominent studies that report how much of an extra return you might expect from working with a financial advisor (about 3 to 4 percent, depending on the report). But, again, you can do this on your own. But first, you need to be made aware of those factors so that you can apply them correctly.

Three of those studies are MorningStar’s “Alpha, Beta, and Now … Gamma”; Envestnet’s “Capital Sigma”; and Vanguard’s “Advisor’s Alpha.” These studies found that financial advisors don’t add much value to investment selection (less than 1 percent of additional gain, depending on the study). It turns out that professionals are as bad as individuals when it comes to picking winning investments. To be fair to my colleagues, I am included in that. I don’t have any special sauce other than being self-aware. I don’t obsess about beating the market when it is going up; I focus as much time on when I need to be out of the market as I do on what to hold when I am in it.

That being said, according to those financial-advisor-value studies, the best way for individual investors to juice their returns is to concentrate on:

  • Tax efficiency and tax planning. (Place dividend and interest-paying assets in tax-deferred accounts, tax-loss harvesting, Roth IRA conversions, use of trust accounts instead of jointly held accounts, lot-specific sales.)
  • Withdrawal strategies. (Determine which accounts to pull cash from, calculate when distributions should be taken, and reduce income tax through charitable contributions.)
  • Behavioral coaching. (People buy on greed and sell on fear. Instead of trying to stop the pain of lower stock prices by pushing the “sell” button, investors should follow Warren Buffet’s advice that “the time to buy is when blood is in the streets.”)
  • Cost-effective implementation. (Select low-cost ETFs or index funds instead of mutual funds with high expense ratios. Avoid investment managers who charge high fees and offer limited financial planning advice.)
  • Financial planning. (Admittedly, this is a tough one for individual investors—you might want to hire a CERTIFIED FINANCIAL PLANNER professional to learn more before doing this part on your own. You can find a CFP professional on the CFP’s website.)

Regarding the value of a CERTIFIED FINANCIAL PLANNER professional, the Financial Planning Standards Board (FPSB) conducted a global study demonstrating that clients of CFPs “have a better quality of life, enjoy more financial confidence and resilience, and are more satisfied with their financial situation.” The FPSB sets the standards for the CFP designation.

Dante De Gori, CFP, Chief Executive Officer, FPSB, says, “In this current volatile climate, where unexpected events can send shockwaves through the global economy, the role of financial planning in general and of CFP professionals, in particular, has become even more critical in empowering consumers to make informed financial decisions and achieve their long-term goals while enjoying a better quality of life.”

Intelligent investors are aware of the costs. More visionary investors recognize value. There is more to investing than fees; it’s what you get for those fees. You can get those things independently, but you may want to learn from a professional.

Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at


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