In many areas of life, people can reasonably expect to pay more for a higher quality product. As LARRY BATES explains in this video though, the investment industry works a little differently. He explains to ROBIN POWELL how investors can reduce their costs and have a better overall experience in the market.
Robin Powell: A common mistake that investors make is to assume that product providers have their best interests at heart. In fact, their primary motive is to generate profits. The higher the fees they charge, the greater the profits they make. The problem is, consumers are conditioned to think that the more they pay for something, the better that product is.
Larry Bates: Usually that’s the way it works in the consumer world that we’re used to, but in the investment world, it generally works the opposite way. The higher the cost of the product, the poorer the performance, and that’s simply because the higher the fee, the less there is for the investor at the end of the day – and the compound effect of that. So, I think we have to watch out a little bit for the industry because they’re obviously motivated to sell higher-cost products. That’s the way business works.
RP: In his book Beat the Bank, Larry Bates highlights several secrets that the fund industry doesn’t want you to know. The biggest secret of all, he says, is that fund managers are nowhere near as good at beating the market as they would like you to think.
LB: Fund managers generally portray themselves in their marketing as being brilliant stock-pickers. They portray themselves as having the ability to pick the stocks that are going to outperform and avoid the stocks that are going to underperform. But the statistics show that, overall, fund managers aren’t able to do that. In fact, they generally underperform market indexes.
RP: So if the industry isn’t your friend, who can you trust? Larry recommends seeking out an independent, evidence-based financial planner.
LB: Do-it-yourself investing has become a lot easier over the last decade or two, and that’s fantastic and I think suits many investors – but a lot of investors, even those that have a good understanding of investments, want ongoing advice. And ongoing advice can be of great value, in terms of investment selection but maybe even more so in terms of managing overall financial affairs: financial planning, retirement planning, and guidance in a whole bunch of other ways.
RP: Ultimately, you need to decide which costs are worth paying and which ones aren’t. And remember, paying higher fees in the hope of higher returns rarely pays off.
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