By Frank Conway, BSc, QFA
In his annual letter to shareholders, Warren Buffett estimates that up to €100 Billion of investors money is wasted by high-flying investment managers. These are the people that tell their customers only ‘they know how to invest money, only they should travel the world in high-flying luxury seeking out ‘clues’ about the next big thing and only that they know best!’
“Nonsense” says Buffett.
Nonsense because his 10-year wager that tossing the high flying ‘active’ managers overboard would generate more wealth, not less has proven to be an overwhelming success.
Buffett was right all along.
So, let’s take a step back and look at what the debate is really all about.
10 years ago, Warren Buffett predicted that the evolution of the stock market meant that over time, as computer trading took an increasingly central role in the purchase and sale of equities and other investments, the role of the investment manager would become a less central one. But more important, the role of the ‘active’ manager would be exposed as an expensive fraud.
Despite this, investment managers have clung to power.
In theory, the concept should make sense but in reality, it does not and there is an ocean of evidence to prove that paying these stock market ‘visionaries’ is a massive waste of money, in fact, it is a massive con-job.
And the people the lose the most? Ordinary pensioners savings for their future retirement needs.
Using the normal distribution curve, the mounting evidence against highly paid, ‘active’ investors is damning and perhaps the figure that best sums up the massive waste is Mr. Buffet’s $100 Billion.
€100 Billion lost to ego, greed and inefficiency.
For investors that care about their own financial well-being, it is imperative they get to know how to take back control of their own financial success.
Understanding how fees destroy their personal wealth growth is an important first step to stemming the loss.
For a start, consumers should ask their investment adviser how they get paid for their work. Do they earn ‘TRAIL COMMISSION’. If they do, then they cannot have the financial well-being of their client as their first priority. If there is ‘trail commission’, DUMP THEM!
Second, clients must understand the relevance of TER/OCF – this means Total Expense Ratio / Ongoing Charges Figure – these are measures that explain the TOTAL cost of charges that apply to funds under management. While most advisers claim this to be an all encompassing fees disclosure, it is not 100% complete but is as close as one is likely to get to the true cost of all management fees.
And the reason that TER / OCF is important is because it is the best available measure of the negative impact on compounding growth potential. By this, I refer to the growth of money potential. The lower the TER / OCF, the faster money will grow. The higher the TER/OCF, the less potential that money will ever grow at its maximum potential.
Which brings me back to Warren Buffett.
Using his ‘passive’ approach, money invested where management fees are say 150 (1.5%) basis points as opposed to say 350 basis points means that on retirement, the average worker could have an extra €50,000, €100,000 or more in their personal retirement fund. Yes, this is the power of getting that management fee to the lowest possible number.
It is little wonder that Mr. Buffett has been so vocal for so long.
After all, why pay a swash-buckling, Mercedes-driving investment adviser when you can get better returns and buy the Mercedes yourself?
Advice – cut those management fees, banish the ‘trail-commission’ and watch your wealth GROW!!!