Are excessive financial fees eating your returns?

[RunningBum]

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Originally Posted by InParadise But the one thing I just don't understand is the desire to put your funds in an index fund....

I could just as easily write up a straw man argument that people investing in managed funds chase returns, and panic easily when the market turns, so how do you protect yourself from the volatility of those funds? And I could further argue that index fund holders tend to be more of the "buy and hold" mentality so those have less volatility in bad times. So I'm not inclined to debate your straw man argument that in my opinion is not valid.

History has shown that while some managed funds outperform the index that matches their type of investment, more do not. Congrats on finding a manager who can pick funds or perhaps individual stocks that beat the index for three years, or however long it's been. Maybe you'll be fortunate enough that he or she can continue to beat it by 1% in the future to cover the fees and still do better. I wouldn't try to convince you to invest your money any other way.

[InParadise]

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Originally Posted by RunningBum I could just as easily write up a straw man argument that people investing in managed funds chase returns, and panic easily when the market turns, so how do you protect yourself from the volatility of those funds?

I'm not arguing, I am asking a question based on observations made when I was handling the investing. I'm not looking to convince others nor be convinced to change the way I invest. I am comfortable with it, and realize there is more than one way to go.

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Originally Posted by RunningBum History has shown that while some managed funds outperform the index that matches their type of investment, more do not.

Given the changing nature of investing, with it opening up to anyone who has the low minimum $$ to deposit and exiting the largely professional or uber wealthy investor only base, I wonder how far back historical data is valid for today's market which has experienced a paradigm shift via self-managed accounts. Is the truism still valid?

[REWahoo]

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Originally Posted by InParadise Given the changing nature of investing, with it opening up to anyone who has the low minimum $$ to deposit and exiting the largely professional or uber wealthy investor only base, I wonder how far back historical data is valid for today's market which has experienced a paradigm shift via self-managed accounts. Is the truism still valid?

Interesting question. A search of "actively managed funds vs. index funds" came up with this:

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October 6, 2013, 5:00 a.m. In the last five years, stock mutual fund managers had two big opportunities to show how much they deserved your money — and trust. First, they could have limited your losses in the harrowing 2008-09 market crash. Second, they could have anticipated the market's powerful rebound and loaded up on the shares that would end up performing best. But instead of demonstrating their brilliance, the majority of fund managers came up short: In most major categories of stock mutual funds, investors would have been better off just owning the market as a whole instead of trying to beat it, data show.

Actively managed mutual funds fall short again — and investors notice - latimes.com

[Texas Proud]

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Originally Posted by InParadise I'm not arguing, I am asking a question based on observations made when I was handling the investing. I'm not looking to convince others nor be convinced to change the way I invest. I am comfortable with it, and realize there is more than one way to go. Given the changing nature of investing, with it opening up to anyone who has the low minimum $$ to deposit and exiting the largely professional or uber wealthy investor only base, I wonder how far back historical data is valid for today's market which has experienced a paradigm shift via self-managed accounts. Is the truism still valid?

I will just give an example that I saw on TV... I think you know who Cramer is...


When it was close to the end of the year.... he was saying that if he were ahead of the market he would sell everything and go watch movies... he would not want to take any risk of blowing it in the last month...



Also, every fund you are in has fees... period... there is no way of getting around it... they have to pay for their operations and the big salaries the fund manager wants... Why not put some info down where we could take a gander... what are your top 5 holdings if that is to many, the top 3... I would bet that there are some 12b-1 fees involved... you might not be paying a load, but I doubt you are getting it for 'free' like you say....

[Sarah in SC]

In Paradise, you may be assuming that everyone on the forum *only* uses index funds, when that may or may not be the case.

However, there is a strong DIY component to these pages, up to and including selecting your own active and passive investments rather than having a financial advisor do that for a fee.

Everyone makes their own decisions, though, and if you are happy, then that's it. But there are plenty of folks who enjoy the research element of DIY, and aren't likely be dissuaded from their own ways.

As always, YMMV.

[dtbach]

There are however some actively managed funds that have beaten their benchmarks for a considerable time and also have low fees. I'm thinking of Vanguard's Wellington and Wellesley funds in particular. Some Fidelity funds have done it too.

[aim-high]

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Originally Posted by samclem He's probably got a gig like that. He just takes some small retail clients as a way to pay back society for all it has given him. He'd charge them nothing at all, but then they wouldn't appreciate the fantastic value of what they are getting. The generosity of some people is heartwarming.

[Ready]

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Originally Posted by dtbach There are however some actively managed funds that have beaten their benchmarks for a considerable time and also have low fees. I'm thinking of Vanguard's Wellington and Wellesley funds in particular. Some Fidelity funds have done it too.

I would be curious to know if those funds would have beat the index funds if you had to layer an additional 1.5% in advisor fees to access them, versus doing it yourself and buying index funds without an advisor.

[InParadise]

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Originally Posted by REWahoo Interesting question. A search of "actively managed funds vs. index funds" came up with this: Actively managed mutual funds fall short again — and investors notice - latimes.com

Interesting link. Thanks.

[dtbach]

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Originally Posted by Ready I would be curious to know if those funds would have beat the index funds if you had to layer an additional 1.5% in advisor fees to access them, versus doing it yourself and buying index funds without an advisor.

If you layered an additional 1.5% they would of course not come close to beating the indexes. They beat the indexes by less than 1%. Both however were less volatile which made the 2008-09 plunge a bit more bearable.

[InParadise]

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Originally Posted by Sarah in SC In Paradise, you may be assuming that everyone on the forum *only* uses index funds, when that may or may not be the case.

Not at all.

I totally understand the DIY drift, having managed our portfolios through individual stocks and mechanical investing for 17 years before going through a FA. DH could not handle my risk tolerances anymore, and as we approached retirement it was necessary to tone it down.

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Originally Posted by Sarah in SC Everyone makes their own decisions, though, and if you are happy, then that's it. But there are plenty of folks who enjoy the research element of DIY, and aren't likely be dissuaded from their own ways.

I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. What people choose to do with their own money is up to them. Who knows, maybe down the road when things get less hectic I may decide I have the time to go back to managing our funds. After all, what is the point of being on a discussion board if you don't have an open mind?

It is also interesting to note that I am the one who has not tried to convince others to change their investment approach, but took quite a bit of heat for simply professing that it is net return that counts, more than just focusing on minimizing expenses, and citing the example of what has worked for us in this vein. This does not preclude the minimizing expenses from having the best net return!

[dtbach]

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Originally Posted by InParadise Not at all. I totally understand the DIY drift, having managed our portfolios through individual stocks and mechanical investing for 17 years before going through a FA. DH could not handle my risk tolerances anymore, and as we approached retirement it was necessary to tone it down. I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. What people choose to do with their own money is up to them. Who knows, maybe down the road when things get less hectic I may decide I have the time to go back to managing our funds. After all, what is the point of being on a discussion board if you don't have an open mind? It is also interesting to note that I am the one who has not tried to convince others to change their investment approach, but took quite a bit of heat for simply professing that it is net return that counts, more than just focusing on minimizing expenses, and citing the example of what has worked for us in this vein. This does not preclude the minimizing expenses from having the best net return!

Well said. Some on this board apparently think every FA is a wolf in sheep's clothing I guess. I'm sure that many FA's were worth their fees with "hand holding" folks during the last few "plunges". I'll never forget the first time it happened to me in '87. I was just starting out and I was freaking out, but I had an FA who calmed me down and told me to "hang in there". The rest is history. How many folks were "saved" in 08-09' who didn't pull all their assets out because their FA "held their hand"??

I don't have an FA now as I am confident in my investment abilities. But many others aren't and perhaps having an FA works best for them.

[target2019]

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Originally Posted by Ready A nice article in today's edition of USA Today. It summarizes how excessive fees can become over time, and how overpriced financial advice really is. I know this is not new information to the members of this forum, but I thought it was nice to see an article with such a strong opinion published in a mainstream newspaper. Hopefully it will catch the attention of those who don't think about this stuff and allow others to make far too much off their retirement savings. Are excessive financial fees eating your returns?

"He's a nice guy." Oh boy, that is mentioned in every story and thread about FAs, isn't it? The important question to ask is, "What's the benchmark?" I'm going to an FA dinner tonight. Gonna ask that question and bring the answer back here.

Some investors need advisors. But this question is always on the table: Can the advisor deliver results that exceed the benchmark + the advisor costs and all fees?

[Sarah in SC]

I think the "heat" offered up on this board comes from the collective experience of seeing lots of people come here for help extricating themselves from parasitic relationships with stockbrokers. This may give the appearance of piling on when it is just that they've seen it all.

You might not have had time to look at my profile, but I'm a Certified Financial Planner, one who actually does manage people's money, for money.

[dtbach]

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Originally Posted by Sarah in SC I think the "heat" offered up on this board comes from the collective experience of seeing lots of people come here for help extricating themselves from parasitic relationships with stockbrokers. This may give the appearance of piling on when it is just that they've seen it all. You might not have had time to look at my profile, but I'm a Certified Financial Planner, one who actually does manage people's money, for money.

Well said.

[brewer12345]

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Originally Posted by InParadise Not at all. I totally understand the DIY drift, having managed our portfolios through individual stocks and mechanical investing for 17 years before going through a FA. DH could not handle my risk tolerances anymore, and as we approached retirement it was necessary to tone it down. I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. What people choose to do with their own money is up to them. Who knows, maybe down the road when things get less hectic I may decide I have the time to go back to managing our funds. After all, what is the point of being on a discussion board if you don't have an open mind? It is also interesting to note that I am the one who has not tried to convince others to change their investment approach, but took quite a bit of heat for simply professing that it is net return that counts, more than just focusing on minimizing expenses, and citing the example of what has worked for us in this vein. This does not preclude the minimizing expenses from having the best net return!

You are no doubt aware that every forum has certain tenets which represent the overwhelming majority view, and in the case of this place that is indexing. You are up for a heavily engaged discussion if you want to argue for other ways of investing, but minority opinion is tolerated here. A number of us engage in everything from market timing index ETFs, to trading options, to trading junk bonds, to real estate, etc. on out to Venezuelan Beaver Cheese futures. To the extent people talk about it, there is a subforum for such things.

If what you are doing for you works, via con Dios. I personally think you are probably either taking risks you do not appreciate or have the wrong benchmark, but life is all about choices. Its hard to ignore decades of scholarly research that shows conclusively that a rebalanced index portfolio that focuses on low costs and tax efficiency is highly efficient and probably the best choice for 95+% of retail investors. As I switched to ESR I rejiggered my portfolio from individual securities often highly concentrated to increasingly index vehicles. This reduces my risk materially, which is of most importance, and keeps me from blowing myself up. I still have some individual security positions that I manage, but it is down to about 1/3 of my portfolio and will decline as a proportion of the total as time goes on.

[ERD50]

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Originally Posted by InParadise ... I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. ....

I totally support that 100%. I listen and discuss investments outside of my current 'style', as I may find that I'm missing something. Discussion is good, IMO.

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It is also interesting to note that I am the one who has not tried to convince others to change their investment approach, but took quite a bit of heat for simply professing that it is net return that counts, ...

I'm not sure anyone is giving you any 'heat', it's just that this group has reason to be skeptical about claims like : " Our FA beats benchmark every time."

I think it was Carl Sagan(*) who said "Extraordinary claims require extraordinary evidence.". Now, maybe your claim doesn't quite reach the level of 'extraordinary', but the data says it is at least a rare thing, maybe even an outlier (even an overall positive approach may not beat the benchmarks every time). And of course you don't need to provide any 'evidence' if you don't want - but if you really want to engage in a serious discussion, then people here are going to want some data to understand those claims. Some of those questions were about the benchmark, performance net of fees, etc.

W/O some background, I suppose many here may look at your statement as bragging (you and FA are smarter than everyone else), rather than a serious discussion of active versus passive fund investing.

So, can you tell us about those benchmarks, and how the FA performed in up and down market cycles? And how would an individual go about finding an FA with benchmark beating performance?

(*) edit/add: Sagan popularized the phrase, more on the origin here: http://en.wikipedia.org/wiki/Marcello_Truzzi

-ERD50

[target2019]

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Originally Posted by InParadise I really don't understand the seemingly automatic correlation between wanting to discuss a topic and it being viewed as trying to dissuade someone from their own POV. The only horse I have in this race is pursuit of a good discussion that leads to the possibility of learning new things. What people choose to do with their own money is up to them. Who knows, maybe down the road when things get less hectic I may decide I have the time to go back to managing our funds. After all, what is the point of being on a discussion board if you don't have an open mind?

We never had a financial advisor, but in-laws have had two, maybe three, firms since 2000 or so. Our path has been to read and re-read books, articles, and discussions. In addition we venture out to FA dinners to get the free food and act as filters for what we hear. We pass this info along to AARP. We are content with index funds and what the market delivers. I have one major question for any FA, which is, "How did you help your clients mitigate the great recession?" There is never an answer.

In-laws had a poor experience. The first FA was a nice, older guy. Then the nice, younger guy stole their business. About 2005 they asked me to get involved. It was a mess. For instance, they paid the advisor to do their taxes, and he handed them the tax forms to send to IRS. Problem was that the forms were marked "self-prepared." In-laws are now partially managed by a well-known management company. The fees are too high, IMO, but there are some adjustments we've made to partially correct for the fees.

I could go on, but the point to be made with anyone so situated is that there are costs and implications when you do business with an FA. For instance, I'm sure you've done this analysis yourself, but what is the bottom line delivered by an FA? If a 60/40 fund like VBINX delivered 17.91% (vs. benchmark 18.25%), then what was the return of a specific FA-managed portfolio?

[daylatedollarshort]

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Originally Posted by ERD50 I think it was Carl Sagan(*) who said "Extraordinary claims require extraordinary evidence.".

A 1% fee on an average of $1M portfolio over 50 years would be $500K in fees alone. Statistically that is a pretty high hurdle to overcome let alone beat "every time." Even Warren Buffett has his not so great years.

[Midpack]

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Originally Posted by InParadise I get zero benefit from trying to convince you guys, and have zero desire to do so. After all, I know how hard I was to convince and that is way more work than I care to do. But the one thing I just don't understand is the desire to put your funds in an index fund. I've never been a fan of them and never used them when I was handling our investments. The result was that when the market plunged, acerbated by all the lemmings who had thrown their retirement accounts into these well publicized funds panicking and pulling their assets from the market, my account was not badly impacted. IMO index funds are the McDonalds of investing. Everyone knows about them, and many eat there for convenience. Please realize that I am not calling you a lemming for using these funds, but it seems to be the investment tool of choice for the general public who has not yet learned what else they can do with their money. And when so many people who don't realize the market doesn't only go up, nor understand that panic selling can be the very worst thing own this investment vehicle, they can trigger irrational declines. So if you invest primarily in index funds, how do you protect yourself from the actions of the lemmings throwing themselves off the cliff when the volatility got to be too much for them?

So you've found one of the elusive advisors who can consistently beat the averages, congratulations - seriously. Are you going to give us his/her name so we can get in on the action, or tell us how to find our own above average FA beyond any shadow of a doubt? If not, what's the purpose of your post #3? Few if any of us are concerned with convincing you of anything either, it's your money. But newbies do come here to learn, so if you're going to make a claim they're naturally going to want to believe, maybe give them any basis to support it.

The subsequent quote above suggests you don't understand the fundamentals of passive investing which include the discipline to avoid panic selling/market timing. While it's clearly a major hurdle in successful investing, lack of discipline is not exclusive to passive investors to my knowledge, happens to DIY investors, pros and everyone in between all the time as well. Do you have something that shows otherwise?

And investors usually come to full on passive investing precisely because they do "realize the market doesn't only go up."

Just one study re: index investing picked somewhat at random, out of hundreds. Study: Only 24% of Active Mutual Fund Managers Outperform the Market Index | NerdWallet Investing

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Only 24% of professional investors beat the market over the past 10 years Index funds outperform actively managed funds by 0.80% annually, but active managers have lower risk Active managers outperform the index by 0.12% before fees, but charge more in fees than the value they create The study looked at more than 24,000 mutual funds and ETFs available to U.S. investors for the ten-year period ending on December 31, 2012. Of these, only 7,943 were in existence for the full ten years. The asset-weighted average return of the actively managed mutual funds over this period was 6.50% while the passively managed index products averaged 7.30%. Similarly, for equity funds the average return was 7.19% for active managers and 7.65% for passive funds. Index funds outperformed actively managed funds regardless of whether returns were measured by asset-weighted average, median, or a simple average.