Comments on Performance and Fee Structure (Part 1)

Today I continue discussing comments on Dr. Mark Perry’s July 2014 blog addressing the Jason Zweig post.

     > this gets badly exacerbated by the fact that commissions have
     > dropped like a rock. trading commissions are down maybe 90%
     > since the late 90’s…
     >
     > this has… driven… better advisers into other businesses (like
     > hedge funds… to get profit share, not trading commissions),
     > which has taken the cream (and then some) off this group…

Thereby “dumbing down” performance as a result of going cheap with investment expense?

     > if you get 3 times the fee for recommending an active fund and
     > 10 times for selling life insurance or annuities, the adviser
     > now has his incentives set up in opposition to his or her client.
     >
     > they sell you what’s profitable for them, not for you.

Isn’t the fiduciary standard supposed to prevent this? To be discussed at a later time…

     > so, the guys that are really good investors leave the business,
     > and the guys who are good salesmen stay but have incentives set
     > up opposite yours.

Here again is the idea that advisers* are salespeople rather than knowledgeable/experienced investors (mentioned here, here, and here).

     > this is a space one needs to be VERY careful with.
     >
     > most of the folks in it are not adding any value and would not be
     > paid to do so even if they could.

This is an interesting reference that echoes my previous discussion of how difficult it is to generate solid performance.

Another reader replied:

     > …Guiding clients into one of three or four risk categories and then
     > publishing the results of each category solves the tailoring problem.

I certainly agree that all clients do not need to be different. I will address this in another post.

     > Clients should not be self-directing. Company stock, large amounts of

I’m not sure why he would discourage self-directed investment activity. I encourage this for anyone looking to improve financial literacy while performing better than most of the “professionals” because with knowledge and experience I certainly believe they can.

     > cash for real estate, and other unique holdings can be segregated
     > into a holding account that is not included in the performance report.
     > Even brokers can charge flat fees now, so commission incentives should
     > be a thing of the past.

I agree. I also think the incentive to outperform run-of-the-mill robo-investors or passive index strategy approaches must be provided as something more than a bare-bones management fee to make these advanced efforts worthwhile.

* “Financial” or “investment,” which I think are used interchangeably even though the latter has a legal definition (and more
   appropriately refers to representatives rather than IAs themselves