When Costs Go Down – Wealth Goes Up
There are two sides to the performance equation- returns and expenses. To increase performance, you can either increase returns or lower expenses. Returns are hard to control, while expenses are very easily managed. Ironically, most investors opt for the more exciting avenue of increasing their return via additional risk. Common sense on the other hand demands that the more controllable aspect of lowering expenses is the prudent route to achieve consistently improved performance from your investment portfolio.
We strongly advocate achieving a performance premium through a continual mitigation of any and all costs. A nearly comprehensive list of everyone or everyone who has their hand in the cookie jar would look like this…
- Manager Fees
- Trading Costs
- Trading Tax
- Investment Expenses
- Advisor Fees
If disclosed honestly, these costs can create quite a headwind for your money to overcome. In fact, most investors who choose to ignore the expense side of the equation are unlikely to even achieve market results. As of 12/31/2018, Personal Capital reported the published fees for most brokerage and advisory firms being above 2%. In today’s environment of shrinking Alpha, a 200 basis point performance drag is significant. Let’s briefly address each of the components that contribute to lower performance.
MANAGER FEES - Some people have the time, talent, and temperament to manage their own investment portfolio, but most folks rely on a full-time professional to oversee the funds towards a specified goal or objective. The typical money manager fee is around .5% to 1.5%. VFA,Inc. has successfully been able to lower our management fees to .35% thereby increasing our client’s wealth.
TRADING COSTS - Every time you buy or sell in your portfolio, trading costs are triggered. A typical portfolio has trading costs of .80%. At VFA, Inc., we have negotiated our trading costs down so that even a client receiving monthly distributions only sees trading costs of 0.0695%. For everyone other than an actuary, I think this would be considered as statistically zero.
TRADING TAX - For all taxable accounts, a buy or sell also triggers a gain or loss. Gains generate the additional cost of tax. As such trading tax must be included when considering overall drag on a portfolio from fees. At VFA, Inc., we manage portfolios at that household level. This enables us to control all the trades and relegate them in the tax-advantaged accounts thereby mitigating any concern of trading tax becoming an issue.
INVESTMENT EXPENSES - By utilizing exchange traded funds (ETFs) of broad market indices, we can keep investment costs extremely low. I am very pleased to report that Vanguard recently reduced the fees in the World Stock index fund we use from 11 bps to 9bps. That is nearly a 20% decrease which flows immediately to the bottom line of performance. By employing this strategy in our portfolio design, we are able to build extremely well diversified portfolio for under .10%!
ADVISOR EXPENSES - If you are only outsourcing the investment management of your portfolio to professionals, you may not be paying for financial planning services. However, if you are getting help with your financial planning along with your investment management, you can expect to add another 1% or more to your overall costs. Now – while it’s true that planning done correctly never costs- it always pays, the principle is still the same; the lower the costs, the higher your wealth. At VFA,Inc., we embrace this principle and have been lowering our fee continually for years. We currently boast an industry low of .05% to .95% financial planning/Advisory fee depending on the size and complexity of the plan.
An “all-in” out the door load for the typical investor is 3.81%. That means that not once in a while, but every year, their portfolio needs to outperform the markets by nearly 4% just to keep up with the markets. Our all-in cost of only 0.40% to 1.30% allows our clients to experience better performance year in and year out. The lower the costs- the greater the wealth. This is the future of financial advising.