…..particularly in the absence of value.   In a recent New York Times article titled “Give Fees an Inch, and They’ll Take a Mile”, Jeff Sommer references a recent bulletin for investors issued by the S.E.C. – How Fees and Expenses Affect Your Investment Portfolio.”  

Needless to say, the effect is not positive.  

Carefully monitoring investment expenses is one of the most reliable ways any investor can improve their bottom line.  But in the complex and opaque world of investment products investors operate in today, this is easier said than done.  As an example, while the article focuses on mutual fund total operating expense (expense ratio) as the key expense metric, in reality stock mutual funds pay additional  expenses which come out of the return to the investor but are not captured by the expense ratio in transaction costs – the cost to make trades in the portfolio as directed by the manager.  Research on this issue suggests the cost of trading adds between 0.50% and 1.5% for most actively managed mutual funds.  

With expenses of this magnitude, it is clear that carefully considering the trade-off between expenses and benefits offered by different asset classes and investment products is one of the important ways a good advisor can add value.  And of course the answer isn’t the same for every investor.  Investment time horizon and investment objective (total return versus income, for example) can play a key role in evaluating these tradeoffs.  Monitoring and controlling expenses is definitely an important element of thoughtful portfolio construction – but it isn’t the only metric that matters.  

For most investors, constructing the an optimal portfolio will involve use of some investment products and/or asset classes that aren’t necessarily the least costly, but add meaningfully to achieving the investor’s primary investment objective.

Read the full New York Times article here: http://nyti.ms/1i1K9rO

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