Fees are inevitable in the financial industry. No one can be expected to work for nothing and there is nothing wrong with a business earning a profit. The question is “is it a fair profit”. One of the problems of the financial industry is that for too long the fees have been excessive. While this is great for those working in the industry, it works against investors’ interests in building a long-term investment portfolio.
In most forms of retailing, a 1 to 2 percent profit is low, but when it is paid every year on an investor’s asset base, it amounts to a huge reduction in the investor’s long-term portfolio values. Annual fees are paid out year after year. If an investor would look up the effects of compounding over 10 or more years, they would see that total effect is significant. Many investors would be surprised. Go out to 20 years and the reduction in value is unbelievable. This is the driving force for the recent explosive migration of investors into index funds – the reduction of fees.
A great book to read on the financial industry is “Enough” by John Bogle. Bogle is the renowned founder of Vanguard. Early in his career he started to pitch index funds. At that time, his pitch fell on deaf ears, but over the years Bogle’s efforts have been significantly responsible for the current evolution of the mutual fund industry toward index funds.
If you are not really familiar with the financial industry, the book “Enough” is a great primer. It provides a “wealth” of information that many investors are unfamiliar with and it is essential reading. Investors must be informed if they are to achieve the best results on their investments.
“If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.”
― Warren Buffett
Keeping a lid on fees is essential to success in building a retirement portfolio.
There is nothing wrong with a fair profit to sustain the financial professional’s career, but knowing what that fair profit is is the difference between a great retirement and an average retirement. Your choice!
