The Race to Zero

In All, Everyday Life, Retirement by Brian Imrich

Today the awareness of investment-related fees is higher than ever. While Benjamin Graham and other professional investors wrote about the erosive effects of high mutual fund management fees, trading costs, and advisory fees many decades ago, Vanguard Funds can be credited with really starting the competition to lower fees by using their low fee structure as a comparison point and bringing the issue to public attention. Today, some Exchange Traded Funds and Index Mutual Funds have lowered their costs so much, you really have to wonder where it will stop, and whether any value might be left on the table. In addition, investing platform fees, trading fees, and investment advisory fees have become both more aggressive and more transparent, the latter of which should be the standard in the industry.

Why has the financial industry become so focused on undercutting fees instead of increasing their value to justify the expense? It’s really very simple. The fees are easily measurable and can be compared from fund to fund, platform to platform, and advisor to advisor. An investor can make a spreadsheet with all the options in their investing universe and sort them based on the lowest possible fee structure. In reality, fees are one part of a large number of selection criteria that have to be evaluated to determine if you are getting real value from the financial professionals in your employ.

When you buy a car, it usually isn’t just a matter of finding the absolute cheapest vehicle on the lot. There are typically many other criteria that must be met before determining if the cost of the vehicle is matched appropriately to its value. Very few people choose a car based only on price, but many people choose their Financial Planner or Advisor based only on fees. The question must be, “what value is this person going to add to my financial life, and what is that worth to me?” If you select a financial advisor based solely on lowest price, it might feel good for a while, until a point in time when you need a greater depth of financial planning assistance and are unable to get it. At that point, the money spent, while lower than other available options, will appear wasted.