Something I Have Never Understood
I have not worked decades in the markets but I have worked enough to get stumped on this. When you hire these banks, these RIAs, these financial institutions to manage your money they might charge you anywhere between 0.40% and 2% usually. The thing is 95% over time do not beat their benchmarks. $10,000 invested in the S&P vs $10,000 invested in their thing in all likelihood would have grown more under a simple S&P 500 index fund like SPY or VOO. The whole industry does this, they promise and sell you on one thing but after 2, 5, or 10 years you get lower returns for higher expense.
I like to think that if Steve Jobs were alive today and he worked in my industry for any length of time he would ask the questions….Why am I paying you more and getting less return? So I pay you more money but get a lower return (and often worse risk metrics) than if I had just put my money in an index fund? hmmmm…it does not compute…
^That is what most of the financial services sector does though, they charge you higher fees for a lower quality product. To put this in simple terms…it would be like if Netflix is the gold standard (which it is) for in home streaming entertainment….Hulu comes along (which is a worse product) and charges you 2x, 3x, or 4x of what Netflix does. Netflix here is the better product hands down but people paying triple the price for Hulu which is lower quality product in this hypothetical example. Its crazy isn’t it? It is something I have never understood.
In the case of financial services its worse though, Some people are paying 1% of more for an inferior product. If you are getting $500,000 at 1% that equates to paying the assumed inferior manager $5,000. If you pay SPY 0.09% that would be $450. You are paying the inferior manager 11x and getting a lower quality product….as I am writing this out it just sounds insane but that is what people do. That is how this industry is set up. I personally think people are getting ripped off, not only on the advisory side, but across alts like hedge funds and private equity….hopefully AI can address some of these issues and give people a better deal because I absolutely hate seeing hard working people get scammed. It is different if there is real value being provided and the returns and metrics are competitive but if they aren’t, that in my mind is when I think people are getting ripped off.
