Fund companies not advisors the cause of higher fees

Fund companies not advisors the cause of higher fees

Fund companies not advisors the cause of higher fees Mitch Tuchman is the founder and CEO of MarketRiders, a Palo Alto company that provides an online subscription service for $150 annually using algorithms to construct ETF portfolios that save clients’ money while meeting their needs.
 
In essence it’s a robo-advisor without the advisor.
 
Last week Tuchman wrote a blog post suggesting that advisors keep 36% of a client’s annual return. Even more disturbing, over the span of an investor’s lifetime that number is as high as 80% of the client’s total earnings from their investments.
 
In other words, Tuchman believes advisors aren’t pulling their weight, an assertion that many competent advisors would take issue with.
 
“First off, while advisors certainly need to justify their fees to some degree, it is the mutual fund managers that need to do so to a much greater extent,” said Burgeonvest Bick Securities portfolio manager John De Goey. “Active management is a zero-sum game before costs and a negative-sum game after costs.”
 
Using a $250,000 portfolio, a 1% advisory fee, and 1.5% in third-party management fees, Tuchman argues that an advisor typically delivers 7% or $17,500 in annual returns for the client while the same client pays $6,250 in fees leaving 4.5% in net returns.
 
Hence, the 36% figure from above. What Tuchman doesn’t explain is whether that 7% is before or after fees. Regardless, a good chunk of the fees in this example don’t go to the advisor, but rather the fund manager, which puts the CEO’s argument in somewhat questionable light.
 
“The typical active fund manager, in contrast, usually subtracts approximately the difference between his/ her fee and the fee charged by a passive product in the same space.  Sometimes more; sometimes less. Stated a bit differently, an advisor might charge 1%, but could plausibly add 1% in value through behavioural coaching, regular reminders, tax optimization and financial planning (among others),” stated De Goey. “In contrast, a person running a portfolio might charge about 1% more than a passive alternative with absolutely no evidence that he/ she will reliably add a lick of value as a result.”
 
While MarketRiders makes a compelling case as to why its subscription service might make sense for certain types of DIY investors, putting the blame squarely on advisors seems off the mark.
“My thinking is that the folks at MarketRiders are barking up the wrong tree,” said De Goey. “The real destroyers of wealth are …not the people recommending (funds).”
 
8 Comments
  • Tony Battista 2015-07-21 10:46:26 AM
    I have known many investments geniuses, day traders, people with a method, people connected to someone that knows when to buy or sell etc... out of them a tiny minority have managed to make money, but the majority lost money.
    Mutual funds companies have a structure with teams of researchers and analysts and then the managers that put together the data for the decision. I guess all this does not come for free. Than there are the governments that levy taxes, and the regulators that want a lot's of explanatory papers. Than there is the profit, because in this world if you do not make a profit you are a goner.
    Us the advisors, have an infrastructure behind us that does not come for cheap (Assistants, rents, computers with programs and maintenance, office furniture and supplies, phones, permits, credits to keep the licence....)
    We gather the information, we attend strategic meetings and seminars, we meet clients, we offer a shoulder to cry on, we listen and deduct what kind of risk taker we dealing with and advise them on products. We advise on strategies on how to save money and taxes, on how to save for the children's education, on financial decisions and future adversities, and savings for the retirement. We take a client from the GIC world of 1/2% and bring him/her into a 4/6% return net of fees within a minimum volatility. Does the client care that he has been deducted an mer of 2 or 2.5%?. This Tuchman will certainly attract a crowd of followers, I do not see anything wrong with it. To each his own.
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  • Will Ashworth 2015-07-21 12:00:52 PM
    Good counterpoints, Tony.
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  • Marie DeLauretis 2015-07-21 12:37:18 PM
    De Goey's comments are much appreciated and respected!
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