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The fee trap - you get what you don't pay for!

Posted by Alex Menzie on 21 November 2019
The fee trap - you get what you don't pay for!

We live in a world flooded with choice... think of any product you've purchased in the last two weeks. How many different alternatives were there? Depending on the product, potentially a significant number.

Think restaurants, cars, clothing, even peanut butter! Was there more than five? More than 10? Chances are there's more choice than you can handle.

In a world of so many alternative options and products, all purporting to do relatively the same thing, how do we determine the best option? All things being equal, I believe we're most likely to be influenced by price. After all, it makes sense to assume that the product with the higher price must be more reliable, have better materials, features or ingredients, will last longer.

Isn't it true that you get what you pay for?

Investment management beware of costs

In 2010 and again in 2016, Morningstar completed research into the impact of investment costs on overall investment return. Their research was compelling and I quote:

'If there's anything in the whole world of mutual funds that you can take to the bank, it's that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds'.

How can this be the case? Well, the data confirms what logically makes sense. Investing is a zero-sum game - for each investor buying there has to be an investor selling and so as one wins the other loses. What sets investors apart is not their ability to know the future and thereby pick winning stocks, but the costs associated with their investment.

Similarly, in 2016 Vanguard released a paper titled 'Vanguard's Principles for Investing Success'. The paper, which references a number of studies on the impact of costs on investor outcomes, included a hypothetical example where $100,000 is invested over a period of 30 years using both a high-cost and low-cost scenario. Assuming an average return of 6%, the low-cost scenario was over $110,000 greater than the high-cost scenario at the end of the period (interestingly more than the original investment).

The research is clear, when it comes to investments and especially when saving for retirement, you typically get what you don't pay for as every dollar paid in fees is a dollar less that is earning return.

Our role as advisers is to educate clients and help them to make informed decisions around important items such as investment cost and value, free from any advertising bias or industry hype. 

Have a read of our investment philosophy to understand our specific approach.


Author: Alex Menzie
Tags: Insurance Financial independence

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The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

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