Tuesday, February 16, 2016

Mouths to Feed in the Financial Industry

Among the many pitches I get for story ideas, one company promises a new approach to investing that will benefit everyone including investors, financial advisors, and fund managers. However, this just isn’t possible.

Very roughly speaking we can divide the investment industry into investors, advisors, and fund managers. Among advisors, fund managers, and their supporting consultants and other staff, there are a lot of mouths to feed in Canada. And the money they get comes out of investors’ pockets.

As long as the investment industry continues to employ as many people as it does now, investors must continue to pay the same high fees they pay now, on average. In kindergarten we learned that 5 blocks are still 5 blocks when they are moved around. Similarly, no amount of rearranging costs can keep all the financial helpers employed while lowering investors’ costs.

The only way the average investor can get lower costs is for the fees going to helpers to shrink. This means lower salaries, fewer helpers, or both. If we manage to bring significant cost benefit to investors in the future, it will come at the expense of advisors, fund managers, or both.

It is this basic fact that has much of the financial industry doing whatever they can to maintain the current high-fee model. Don’t expect anyone to give up their paycheque without a fight.

11 comments:

  1. All Daddy wants is the big piece of chicken (to quote Chris Rock), but which one of them (Advisors, Managers, and Consultants and such) are the Daddy? I think they ALL want the big piece of chicken...

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  2. Career Risk (keeping the fat pay cheques rolling in) is perhaps the single biggest risk for an investor.

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  3. Preet Banerjee wrote about this, how if advisors reduced their percentage, they could make more money. It would be a lower fee, but over a higher amount.

    http://wheredoesallmymoneygo.com/advisors-could-earn-1-million-more-over-their-career-by-lowering-costs-for-investors/

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    1. @aB: I think the idea of Preet's post was that advisors could make more money if they cut out the fund management fees.

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  4. Keep in mind for just how long this battle has been raging -- for at least 40 years. When Bogle introduced the first low-few index fund it failed because no one wanted to sell it and make WAY less money than the then-current status quo. Put another way, if a heavy weight like Bogle had problems reducing fees within his own industry...good luck to the all the Moms & Pops.

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    1. @SST: I'm optimistic that fees will get lower in time, but the process will be messy.

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  5. Some advisors / brokers ARE waking up. They start with a different approach. On a cold call asking 3 or 4 smart questions : Who are you with, how long, have a you done a review? Chances are if the person the ask has been with the same advisor or (pension plan broker of record) for more than 5-10 years, you could easily say "I can save you money", let me do a review. No hard feelings if it turns out you well taken care of, I will be honest with you and part as friends.

    If someone has been stuck in dog Prime America or World financial Group products paying 2.5% or a high fee work P. plan, that's a direct "in" to stealing the client if you sit down explain things and charge half or more in fees.

    So if your patient and a have a clear trustworthy pitch you have a good chance of picking up more clients, and keeping them longer collecting less fees but from more clients. Everybody wins except the advisors who don't really deserve to in any case. They can go back to selling used cars.

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    1. @Paul: You're right that there is a wave of advisors taking the lower cost path for their clients. We'll see whether this trend continues picking up steam.

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  6. If a new approach benefits clients so much they all flock to a particular product, it may benefit those who sell and those who buy the product. Other sellers of similar products would loose out.

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    1. @BHCh: so far there seems to be a fair bit of competition in creating low cost funds, at least for ETFs. It's just a question of how many investors get steered to such funds rather than very high-priced funds.

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  7. This is huge issue that does seem to be getting a small amount of positive traction in reducing costs. I totally agree Michael that there has to be some change with personnel in the industry, otherwise it will be difficult or near impossible to get costs lowered to any degree. And they have a long ways to go to get competitive with other countries.

    It seems to me if more people were saving adequately there could be more managed money to offset a bit of the losses from reduced management costs.

    Yes SST that is a big risk. I experienced and lost that one myself, although ended up okay regardless.

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