Ever looked at the price labels on grocery store shelves? I mean really looked?
Sure you have. Any good shopper knows that the big number is the price of the thing you want to buy, while the tiny number is the price per ounce, per pound, or some other unit.
That way you can easily and accurately compare two products. If a powdered soap from one maker comes in a 20-ounce box and another is in a 15-ounce box, the price per ounce on each label makes it easy to understand which is cheaper.
We also know from labels that the more we buy, the cheaper it gets. Lobster can be cheaper than hamburger — so long as you buy 10 pounds of it.
Buying in bulk is the entire business model at big warehouse stores. As consumers, we’re used to this concept and take for granted that you when you buy more the price goes down.
Yet John Bogle, the founder of Vanguard, recently pointed out in an interview that the exact opposite has happened in the investment industry.
He called the trend toward higher fees “the industry’s Achilles’ heel.” Investment costs should have gone down over the decades, but instead they rose!
“Back in the early years, roughly 1951 to 1961, the industry’s costs dropped from about a 62 basis point asset-weighted expense ratio to 56 basis points, according to the early studies I performed,” Bogle said.
“In those days, it was about a $3 billion industry. Now it is a $20 trillion industry, and the overall expense ratio is about 65 basis points weighted by size. Costs have actually gone up!”
There are now huge economies of scale, but none of the savings has been shared with investors, Bogle continued. Instead, money managers have sought profits at the expense of the investor.
“The private manager can deal pretty well with the issue of cost, because the cost reduction is out of his own pocket . . . if he wants to do that.” Bogle said.
Truckloads of lost savings
You might be thinking, well, I don’t mind what I pay my financial advisor. We go back a long way and my accounts have done fine.
Here’s the thing: Everyone’s accounts have “done well” — if they were prudently managed.
With dividends reinvested, the S&P 500 returned 9.84% every year from March 2008 to March 2018. Back that up to 1998 and the figure is 6.7% annualized.
For simplicity’s sake, we’ll average the two returns to get 8.27%. At that rate, your invested savings would double every 8.7 years.
Put another way, over that 20-year span your $100,000 turned into $489,962.
Now throw in a typical 1% fee for an advisor and another 1% for the mutual funds he buys for you and run those numbers again.
Magically, your total return over the two decades falls to $327,103 — a decline of 33.2%! Your advisor has cost you $162,860. You paid him $8,413 a year to watch your money grow for you, and for him.
You might buy the slightly larger box of soap and be happy to save 6 cents. To make up the lost opportunity from high investment fees, however, you’d have to opt for the truckload size instead.
Bogle has said it time and again. Fees matter. How the investment industry gets away with charging what they do is truly amazing.