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Free alpha or expensive beta? Either way costs matter.


This is a picture about a wealth transfer from an investor to a broker dealer done under color of 'incidental' advisory service.

It's a real story, unfortunately, and in many ways has come to represent the state of the financial services industry where the interests of the client are subordinate to the revenue preferences of a firm operating on a 'suitability' standard.  An unsophisticated investor will get harvested.

By the way, the difference in the picture is just fees. It is the 'wealth transfer' of your money to the financial services industry. Ever wonder who's paying for the mahogany offices?

It's old fashioned, but costs matter and compound over time. More often they're hidden to some extent, certainly not transparent.  In this case the investor was paying a private banking group (of a broker dealer affiliated with a major US global bank) 3% p.a. for separately managed accounts.  The result was about 1,000 trade confirmations a year and unfathomable account statements some 60+ pages long. What to do?

Analysis revealed it would be possible to 'clone' the performance characteristics of the managed portfolio with a diversified portfolio low cost indexed product comprising some nine distinct asset classes. The comparative analysis above assumes an alternative total cost structure of .80% pa, and the results over 15 years increase the wealth of the portfolio by more than 30%

For another perspective, think of it this way: if you expect

  • an 7% equity return (on the S&P 500 or the Wiltshire 5000) and
  • the 10 year Treasury is paying 3% and
  • you have a 50/50 debt/equity portfolio, then
  • you have an expected return of 5% before fees on the portfolio

Let's pretend this is your Roth, so there are no taxes (taxes, of course, make everything worse). 3% pa fees consume 60% of your expected pre-tax return.

Some friends came to us, and this is their story. Unfortunately, it is true.  The private banking group was charging excessive fees for under performing product. As you can see it has significant adverse long term implications for wealth creation. 

It is your money. Make your story end well.  It's too important.


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