Lower Fees Contribute to Returns

In both bull and bear markets, popular media advise strongly that lower fees guarantee a larger return. After all, if you avoid a 1% fee, then you have 1% more money for yourself. John Bogle, founder of Vanguard funds, advocates that individual investors pare away most all fees and “take what the market gives them.”

Prudent experts know that fees can impede return. On the other hand, the expert has a positive duty to make sure that each part of the trust operates smoothly and that often requires delegation. In order to delegate, the advisor must be sure that the service you get adds value to your overall portfolio, either in terms of safety or return. Additionally, he needs to be sure that the fees each expert delegate charges reasonable and customary fees for the services he delivers.

Most importantly, a Prudent Fiduciary may not have a set opinion about fees or commissions, but instead must investigate which of these are necessary and reasonable.

Actual Benefits, not Manner of Compensation Guide Decisions

As an example, it may not be worthwhile for a CFP advisor to spend an hour or two on life insurance planning for a 40 year old with a spouse and two children when the same work can be done at no additional cost by a competent insurance agent. Incurring a fee over and above a commission on that issue simply does not make sense. The client requires competent planning, and if there was a prejudice about fee only issues, then the cost of the service would be greater than it needed to be.

Perhaps the hottest button for investors is the question of mutual fund and advisor fees. With the availability of very inexpensive ETF’s (Exchange Traded Funds,) some would think that mutual funds are a thing of the past. If no one can choose stocks consistently in such a way as to outperform the market, then paying for these services makes no sense. And the popular press is filled with quotes about managers who can’t beat the market net of fees. In light of the fact that individuals and institutions pay billions of dollars per year to portfolio managers, a Prudent expert must examine this statement carefully. On closer examination, the common thinking about stock pickers may be a bit of journalistic sophistry.

Skilled Managers May Reduce Risk

Those who subscribe to the strong form of the Efficient Market Hypothesis must believe that no manger can gain an advantage in choosing stocks at any time. Each price at every time is perfectly correct because of the accumulated wisdom of “the market.” Those who believe the weak form of the EMH may allow that some managers have skill, but that a given investor could not tell whether a particular manger was lucky or skilled.

In fact, it may be that paying a portfolio expert to choose certain stocks over others is money well spent. A Fiduciary Expert knows and uses various means to determine if indeed the managers are worth their fees.

So while the press may lead you to believe that the only way to invest is through the use of very low cost measures, it’s worth remembering that some valuable services are worth paying for.