How Lower Investment Costs Hurt Investors

By Jay Mooreland via

When the price of a good or service goes down, it is almost always a good thing. We all love sales, myself included. Getting a “deal” on something can activate the dopamine receptors in our brain and give us a temporary high. Recently, there has been many new “deals” in the investment realm, from low cost advisory services to a reduction in online trading commissions. Let me explain how these could be bad for investors.

Personal Advisory Services

There are a few institutions that offer investment management, financial planning and access to a Certified Financial Planner professional for around 0.30%. That is a significant discount to the traditional advisor model where the cost may be closer to 1.00% – 1.25%. Money is flocking to these institutions because of great advertising and very low cost. But at what price?

If investors were rational, it would be a no brainer. But we know that all humans act irrationally (make errors in judgement and influenced by emotions). Let’s be honest – the #1 detractor from investor performance is the investor him/herself. In other words, it’s the choices made, not the fee of the program or underlying investment. There is ample evidence to back this up.

How do firms offer comprehensive services at such a discount? It’s called scale. And when you scale something, the personalization and individuality suffers. Sure you get a plan, but how robust is it? You have access to a CFP, but how many hundreds or thousands of people have been assigned to that same CFP?

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