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Efficiently Harnessing Market Returns for Investors.

Why Low Fees are Important

Assumptions in Where Your Returns Go example:

Where Your Returns Go

With no fees over a 30 year period, 100% of Profit goes to the Investor, with a 1.5% Fee, only 58% of Profit goes to the Investor. Does a 42%/58% profit split with your advisor sound like a good deal?

Fee Chart HighFee Chart Low

What's good for your Advisor, Fund Manager, or Hedge Fund, might not be good for You.

One way to think about fees and costs is to think about a gambling casino. The house is now your investment manager and broker, they take a cut of your portfolio either when you trade and as a continuous cost to have your money with her. These costs add up quickly.

However, there's one big difference between the casino and your investments. In the casino's case, if there were no house, the sum of all gamblers' losses would equal the sum of all gamblers gains, the group as a whole is no better or worse off, it mathematically must be this way. We call this an even sum game.

Regarding your investment portfolio, with no costs of any kind, the group return as a whole is expected to be a positive (this is called a positive sum game). The reason; assets are discounted and have an implied rate of return imbedded in them. You would never purposely buy an asset as an investment where you intentionally would get less out of it than you put in. As a provider of capital, you demand a return. Since this is a positive sum game, the investment manager can now take part of your capital and you might still make some money, but not as much as you should. This doesn’t make it right in our opinion, but it mentally allows the investor to participate in the game and have it feel like they’re getting something when in fact, the starting point of what they get should be getting is the return of the market, not the starting value of their capital.

think of it this way, you provide the capital, you take the risk, the investment manager takes 42% of the return, and you take 58% of the return, does this sound like a good deal to you? Fees are much higher than you think.
Tom Owens, Principal and founding shareholder

It’s important to understand that there is a certain amount of return to go around to all investors, and how that return is divided up is a twofold battle:

In this instance, we'll focus on the second issue, how profits are divided between clients and investment people (brokers, traders, managers, consultants...).

The Division of Profits with Your Investment Manager/Advisor

First, what are we paying for? We believe that customers of investment firms are paying for four things:

In regards to the pricing of these services, although almost always bundled together, if we break down these costs, we would find that pricing ancillary services, behavioral coaching, and operations, is relatively easy, how much time does it take to perform these by the firm, and how much do the experts need to be paid. However, in regards to investment advice, it’s much harder to derive.

Summary

An important clarification and nuance about active managers is that it’s not that we have a so many bad active managers, it's actually that they're mostly very good. The nuance is that because there are so many good managers, and that the competition so high, that it creates a situation where it’s difficult for anyone manager to have an edge over another for very long. If everyone chose to index, indexing wouldn't work, no one would be there making the market efficient. It's only because there are so many good active managers that the environment is created for indexing to work so well.