This is a new development, but I think it represents to a key turning point for the investment industry. Competing solely off of price is a bad idea unless a business produces a commodity product – like apples. The better idea is similar to buying at a discount store. You want to get good value for what is paid. The key point is that the purchaser has to know what good value is!
Salesmanship has long been the mainstay of the investment industry. While there is nothing inherently wrong with good salesmanship, the customer has to benefit more than other alternatives available to them. Since it is often difficult to prove the long-term efficiency of an investment manager, there is lots of “wiggle room” for salesmanship to “oversell”.
In the current environment, Investors are becoming more educated in fees and the effects of compounding. This has caused the recent increasing movement to index funds. Very few funds are able to conclusively prove their performance is better than those funds with lower fee structures. Loaded funds imply their returns are better than non-loaded funds. High annual fee funds imply their returns are better than lower annual fee funds. The challenge is that it almost impossible to prove “more expensive funds” are better performers than “less expensive funds”, except for those clearly in left field. With the pickup in investors migrating to index funds, the general investor market is confirming that belief.
That said, many investors will likely “bail” out of index funds when the next severe market downturn occurs. Without having someone “to hold their hand”, many will sell at the worst possible moment. An index fund contains the good, the bad and the ugly. They hold all companies in an index and it doesn’t matter if they are good or bad. They hold the index. An active manager hand picks those investments which are most promising. This will be very important when the market turns South.
While I believe active management is still viable and will remain viable in the future, the “get” has to be commensurate with “give”. The only way to for an investor to protect themselves from getting too little for what they pay is educating themselves about fees, performance and compounding. There is no free lunch.
Being informed and practicing skepticism keeps the transaction on a level playing field. After all, it is an arm’s length transaction.
You could pet a domesticated tiger or you could get your arm bit off. Do your homework. You know that saying “the dog ate my homework” will not benefit your grade (return performance). What would your teacher say if you said that? “That’s your problem!” End of story
Caveat Emptor!
