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The Fees Are Too High

The investment world is rife with worn out cliques that many times lead an investor or even a broker on the wrong path to profit and instead violates any reason or common sense.  It lends credence to the belief that if you say something enough, it becomes true.  I can’t tell you how many times a client will ask me “how much are the fees?” Or “I read the prospectus and the fees are just too high.”  I patiently gather myself and reply. “It doesn’t matter” Whoa you say, what are you talking about. There are entire funds, investments and marketing strategies built on low fees. But all it has ever told me, is that someone is cheap. As you probably know if you are a warm body, cheap is not always better. Would you buy a cheap fire extinguisher to protect your home? Would you buy a cheap airplane? How about a cheap car seat for the grandson. People who compete on fees are saying, “I am cheap!” To me it says you’re not good at what you do, because if you were, you wouldn’t be cheap because you are in demand and make more than others. It would certainly raise a red flag for me. I want the person who is competing on results. “Hey,” They might say; “I’m not cheap, but I’ll put up what I do against anyone. Are we able to guarantee, no, but we keep our eye on the ball-making money.” Isn’t it a fact, most of the time that the best make the most? Are there exceptions? Of course. But I would rather pay a person 10% to net me 40% over a person that charges me 1% to make me 5%. Wouldn’t you? If I knew they were good, I would pay top dollar and be glad I did. So how do you know if they are any good? Hang on I’ll give you the answer in a bit.

So how did this one get started? Well let’s think about this in our uncommon sense mode. I say uncommon sense, because in today’s world if you have any sense at all you are uncommon. Common sense took a break many years ago after the government monopolized the school system and we morally lost our compass. I can imagine high level, corporate executive types sitting in their high-rise office building (bought by unsuspecting shareholders) trying to figure out how the heck they are going to sell these inferior products they have to the unwary. “Look,” says the chief dog; “ we cant’ claim we outperform the other folks because that would be ridiculous, but we gotta sell this stuff so what do we do?” Number two says “lets’ make it cheap. Get that guy over here from one of those money magazines and feed him an idea on how all these mutual funds are ripping investors off with high fees. We can do comparisons on how one index fund compares to another and show how low fees save the day and we are the first to have them. Since 85% of funds can’t beat an index anyway, everyone will eventually jump on the bandwagon, but that will put us ahead for a good while and then we’ll move on to past performance does not indicate future returns.  To my amazement what happened next was what is called the herding phenomenon and writers, TV gurus, and advisors picked right up on it.  It was now the new mantra. What’s easier than writing about and selling low expense ratios? Now all the underperformers had an out and since there are more of them than high performers it was a majority rules deal. Remember the 80/ 20 rule. 20 percent of the people make 80 percent of the money. They were the 80 percent. Guess what unsuspecting Joe Q public got to hear. YOU. Sound familiar? Scott Burns and the rest dove in whole hog and sold a bunch of Vanguard index funds. Rick Edelman later went to etf’s. Guess what happened to folks in these funds in 2008 and 09. But their fees were low. Folks, you need to drink upstream from this herd or guess what…. Now is this a true story? Of course not, but do you see what happened? This is probably closer to the absolute truth than either you or I think! I’ll bet this played out somewhere, because the game to these folks is about sales and gathering assets. I’m not saying sales and gathering assets is bad, I just want you to understand so you can make wise decisions.

Ok buddy boy, what is the answer? Load adjusted returns. After all fees, commissions and expenses are taken out, what did I end up with in my pocket. I will answer the fees or commissions question later. It’s not what you think either.

Guess what, load adjusted returns are reported by Morningstar. So now it doesn’t matter if I buy a load fund, a no load fund or a y share, b share, c share, I get to know the net return on a determined time frame. You know 3 yr, 5 yr, and 10yr, whatever. Great! You say, but now what, how do I compare with all these funds. I know there is Morningstar value line etc. How do I know what the best performing funds are? There are thousands of them and how do I know what funds are the best. I watch TV, I read newspapers, magazines and listen to my friends, and I have never had 2 brokers recommend the same fund as being top producer in its category. Magazines don’t agree. TV guys and gals don’t agree. I’m going nuts Steve! Shouldn’t there be a way to find these funds? How do I know how my growth fund stacks up? Is there a way oh great Orracle? Whaa haa haa. Yes there is….stay tuned.

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