I recently wrote an article for client n1ewsletters and websites explaining how high mutual fund expenses hurts investment returns over the long run. Today, an advisor emailed me asking “why on earth” I would call attention to how expenses hurt returns.
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High expenses are killing many investors and smart advisors can use that to their advantage in marketing. Ignoring the problem of high expenses is bad for business.
The story, which is posted to many advisor websites for clients and prospects to see, references an interview with Vanguard Group’s founder, John Bogle, in the PBS documentary, The Retirement Gamble. In fact, Bogle’s office sent me the PowerPoint slide he discusses in the interview, which is displayed in the story.
Bogle shows in the slide that paying 2% in expenses annually costs a retirement investor nearly two-thirds of his nest egg after 50 years. Because that 2% isn’t compounding, cumulative return is crushed.
Advisors cannot ignore the math. High expenses hurt retirement savers over the long run. Nor can advisors ignore John Bogle. In fact, advisors need to be on the same side as Bogle.
Financial planners, wealth managers, and investment advisors who are fiduciaries and honor-bound to do what’s best for clients, must embrace Bogle’s campaign for low expenses. It’s not a threat.
Most advisors are using low cost ETFs and index funds for core of their portfolios. They may use more expensive actively managed funds to round out portfolios and diversify and that makes sense. But most advisors are trying to keep fund expenses low. Why not tell people that?
Moreover, the story goes on to report that investors who stick with a long-term investment plan can increase returns by 4% annually compared with the average investor, citing a famous study by Dalbar. In the 20 years that ended December 31, 2012, the average annual return of all investors in U.S. stock mutual funds was 4.25%, according to Dalbar, while the Standard & Poor’s 500 returned an annualized gain of 8.21%. Buying and holding, boring as it is, has worked, but you need an advisor to help you stick with your plan.
Advisors who help clients avoid the typical behavioral finance mistake of selling after a volatile downturn can save the average investor twice as much annually as the 2% mentioned in Bogle’s comments on cutting expenses. In addition, advisors can further add value by embracing low cost funds to fill the core of a portfolio.
Advisors are going to face increased competition from low-cost investment alternatives being sold over the Web. You can't hide the cheesee. Advisors need to be able to justify their fees and show invetsors that they save them money by finding low cost funds and ETFs and by helping them avoid the most common mostake invetsors make by selling when markets delcine sharply.
Let me know if if you disagree.