Hidden in Plain Sight

Three Key Investment Strategies Hidden in Plain Sight Strategy #3

Plain Sight Strategy #3: Controlling Costs

In the first two articles of our three-part “Hidden in Plain Sight” investment strategy series, we’ve covered the importance of staying invested to earn market returns while managing the risks involved.  We’ll conclude with what may be the most obvious and powerful advice of all, even if it does receive the attention it deserves.

  1. Being there
  2. Managing for market risks
  3. Controlling costs

Plain-Sight Strategy #3: Controlling Costs

Don’t spend more than you need to.

Why do investors spend more than they need to on their investments?

Revealing the Numbers

While spending less to earn more seems obvious, the costs themselves aren’t nearly as apparent. Disclosure requirements exist in most developed countries, but too often, the focus seems to remain on adhering to the letter rather than the spirit of the laws.

The issue does not just affect individual investors either.  In 2015, the California Public Employees’ Retirement System (CalPERS), one of the largest U.S. public pension funds, embarked on an aggressive campaign to cut costs by seeking to eliminate its most fee-intensive money managers.  According to this Pensions & Investments report, CalPERS officials “concede[d] they have been unable to determine just how much they do pay.” [i]  If the country’s largest public pension fund officials have difficulty assessing their all-in fees, what chance does an everyday investor have?

Crunching the Numbers

Adding to the challenge, many investors don’t realize how seemingly modest costs can lead to significantly different outcomes over time. For example, this Securities and Exchange Commission (SEC) Investor Bulletin [ii] illustrates how a $100,000 investment earning 4 percent annually over 20 years would accumulate $220,000. If you calculate the earning power lost by removing instead of reinvesting a modest 0.25% annual expense, which is in the typical range for a low-cost index fund, you sacrifice about $10,000. Bump that to the 1% annual expenses (or higher) that are often found in higher-cost, actively managed funds, and you’re giving up closer to $40,000.

Demanding the Numbers

Financial professionals and investors alike should insist on clarity wherever it seems lacking. As Vanguard founder Jack Bogle describes in this CNBC article, “If you had a crowd of investors who said, ‘Look, this is just wrong,’ [fund company] directors would have to listen, whether they want to know or not.” [iii]

Instead, there is considerable evidence that, even when investors should be credulous consumers, they seem unwilling to question the costs.  As expressed in a 2015 North American Securities Administrators Association (NASAA) report, “While broker-dealers may be complying with the technical requirements governing fee disclosures, our research shows that improvements are needed to raise awareness among investors of the costs associated with their brokerage accounts.” [iv]

The NASAA report was based on a survey that found widespread confusion among investors. The report concluded: “Brokerage firms routinely charge fees to serve and maintain brokerage accounts, yet nearly one-third (30 percent) of investors said their firm had no such charges and one-quarter (25 percent) indicated they did not know whether they were being charged.”  Of those who did know there were fees involved, more than half did not know the amounts.

In short, the first step in managing investment expenses is to know what they are. A detailed analysis of all-in investment costs is beyond the scope of this series, but we would be delighted to provide you with additional information at any time. Here, we offer an overview. 

Trading costs – When you buy or sell funds, stocks, bonds or other securities, you pay a broker a commission to place your trades. These commissions are typically disclosed in your custodian’s trade confirmation statements.  When your fund buys and sells securities, it is likely incurring trading costs by crossing the bid/ask spread (the difference between where market participants are willing to buy and sell the asset) thus losing investor value.  These costs are not so evident.

Fund management costs – If you are investing in funds versus individual stocks and bonds, you’ll pay anywhere from a lot to a little to the fund company that manages them. These costs typically appear in expense ratio disclosures in a fund’s prospectus or listed as an expense percentage by looking up the fund’s ticker symbol on any number of online services such as Morningstar, Yahoo! Finance and many others.

Advisor support – If you are working with a fee-based firm, like Shore Point Advisors, the advisor fees should be disclosed up-front in the Advisor’s ADV 2A brochures, as well as in the independent statements from the account custodian.  Such fees may be based on the amount of assets under management, could be hourly or fixed rates and may depend on the complexity and level of services provided.  

Administrative oversight – If you are invested beyond the pale of an individual brokerage account containing funds or securities, expect added costs to compensate for the extra administrative oversight and infrastructure involved.  Think retirement plans, separately managed accounts, annuities, hedge funds, Real Estate Investment Trusts (REITs), private equity ventures, and so on. This is a key area where more costs, sometimes significant, are hidden. As a result, investors often fail to realize there are added costs involved at all, let alone the extent to which they may exist.

It’s Your Money

At Shore Point Advisors, we believe we deserve to be fairly compensated for the services we provide – we work very hard to be transparent on that front.  But as an investor, you deserve full disclosures and clear explanations, so you can determine for yourself whether the costs are justified.

If we could offer only one piece of advice on the matter, we would conclude by urging you to heed this familiar adage: If it sounds too good to be true, it probably is.

Shore Point Advisors is registered as an investment adviser with the State of New Jersey.  Shore Point Advisors only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.  Past performance is not indicative of future results. All investment strategies have the potential for profit or loss. There are no assurances that an investor’s portfolio will match or outperform any particular benchmark.  This content was prepared by a third-party provider. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. All expressions of opinion reflect the judgment of the authors on the date of publication and are subject to change.

[i] Toerge, David. “CalPERS Hampered by Fee Complications.” Pensions & Investments, 13 June 2015, www.pionline.com/article/20150615/PRINT/306159977/calpers-hampered-by-fee-complications.

[ii] “How Fees and Expenses Affect Your Investment Portfolio.” Investor Bulletin, US Securities & Exchange Commission, Office of Investor Education and Advocacy, SEC Pub No. 164(2/14), February 2014, www.sec.gov/investor/alerts/ib_fees_expenses.pdf

[iii] MacBride, Elizabeth. “Bogle: How to Boost Investment Returns in 2015.” CNBC, CNBC, 15 Jan. 2015, www.cnbc.com/2015/01/15/bogle-how-to-boost-investment-returns-in-2015.html.

[iv] “Investor Confusion About Brokerage Service & Maintenance Fees” North American Securities Administrators Association, Apr 2015, http://www.nasaa.org/wp-content/uploads/2015/04/Investor-Confusion-About-Brokerage-Service-Maintenance-Fees.pdf