Monday, May 25, 2015

“I Don’t Pay Any Fees”

I was struck recently with how hard it is to get across a simple message about investing sensibly. A friend, Carl (not his real name), mentioned that he needs to get his investments organized, but isn’t sure how to proceed. He asked me what I thought.

I began with the simple ideas of not trading too much, choosing a sensible mix of stocks and safer investments, and avoiding fees. Carl immediately volunteered that he didn’t pay any fees. I countered a little too quickly and forcefully with “yes, you do.”

After I explained that a percentage of Carl’s portfolio gets taken out in fees every year, Carl remembered that he was told that a small fee came out of his returns. I tried to explain that this fee comes out even if his investments lose money and that over decades these fees can eat up one-third or even half of his money. But Carl was skeptical.

Unable to persuade Carl that fees are a big deal, I didn’t have much hope with the rest. I tried to explain that all of his investments ultimately amount to some mix of mostly stocks, bonds, and cash. Carl wasn’t sure if he owned any stocks. He listed a few marketing names for types of accounts and funds at a couple of financial institutions. He was skeptical of my claim that these accounts and funds in turn just hold stocks, bonds, and cash. Somehow, the marketing from financial institutions makes it all seem much more elaborate.

Carl is a smart guy. He even works in a somewhat financial area. But the things I was saying didn’t resonate with him. I don’t think Carl thought the things I was saying were wrong; he just thought they weren’t relevant to his situation.

I find this is a common problem. There are many writers and speakers who have clearly explained the main mistakes typical unsophisticated investors make, but their messages will often just bounce off because they sound irrelevant to people who think “I don’t pay any fees.”

14 comments:

  1. Not paying the obvious fees (i.e. monthly banking, yearly investing fees on accounts) is a good start, but yes, if folks looked a little harder they would see why Banks and Investing firms have such high profit margins.

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    1. @Alan: People aren't bad at eliminating fees they can see, but even careful people can't avoid fees if they're not aware the fees exist.

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  2. If many of the novice people pushing the products don't even really understand how do you expect the average Joe to understand. The products are deliberately constructed and presented in such a way as to make the fee's sound trivial. You have to remember most people have never heard of terms like - DSC's, Front loads, IMF's, MER's, and its presented as such a "tiny" percentage rather than a monetary amount in every discussion.

    We just have to keep hammering on the issue until more people get it, but yes it's frustrating. You need a lot of patience and sometimes you just need to let it go with some folks...

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    1. @Paul: Yes, most of the investment industry has constructed ways to approach clients that hides information on fees. I'll keep trying, though.

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    2. I found a new interesting book you may like it's from 2012 but I just happened across it at a Chapter's on the weekend. (Yea I know - I'm boring I go to a bookstore on the weekend rather then recovering from too many drinks the night before) It's called "Pound Foolish" - Exposing the dark side of the financial services industry. Maybe you have already seen it. It's interesting and funny at the same time.

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    3. @Paul: I've heard of it but haven't read it. I'll add it to my list.

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  3. It's all in good marketing. Clearly he's not concerned with fees, but he may be interested in an investment vehicle with better performance. So you could tell him that mathematicians discovered a secrete way to pick investments, that no one believed at first, but over the last few decades they have proved that it consistently does better than 95% of mutual funds, and it's so powerful that you can't get it through a financial advisor. I'll bet he would be excited by that prospect.

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    1. @Richard: I like it. That's sure to work better than my usual approach.

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    2. I still think the fees angle would be really difficult, but you could ask him if he's heard about high-frequency trading. Then say these funds are specially designed to hide from HFTs and avoid not only those costs, but also some other much larger hidden costs. At that point it should be an irresistible package.

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  4. If you do your own management, and you don't speculate, fees can be a very small part of returns.

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  5. I think you did a good job advising Carl about investments. If he gets - he is smart enough to win, if he does not get it - he will feed the industry and indirectly generate taxes and jobs. Beats many other ways of wasting money.

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    1. @AnatoliN: I tend to see things differently. The financial industry is bloated with far too many jobs. Most of these jobs are sales jobs by those who call themselves advisors and other things. I'd rather see the bottom 75% of advisors do something useful in the world and let the top 25% actually help people with their finances.

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  6. I'm pretty sure people think that I am being scammed or that I am a conspiracy theorist when I tell them about index investing. If they are willing I'll give them a lesson about fees, asset allocation, active vs. passive etc but I haven't figured out a good 1 minute pitch for guys like Carl.

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    1. @Anonymous: Maybe the 1-minute pitch Richard described in a comment above is the right way to go.

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