Aside from advisor fees, there are numerous areas where investors might be losing out
Because of the full-scale rollout of CRM2 and the still-unresolved debate on embedded commissions, investors have become more aware of how payments to their advisors can impact their investment returns. But aside from shaving off these expenses, clients can maximize the money they get to keep by looking at other potential investment costs.
One is product fees, which can be baked into certain active investment products. “A growing body of research finds that most US actively managed stock funds fail to outperform their benchmark over extended periods,” Marc Schachtman, founder and CEO of True Wealth Advisory Group, told the Wall Street Journal. “[B]y using passive index funds you’re giving clients a low-cost option that can outperform more-expensive active management.”
Schachtman said his firm also engages in tax-loss harvesting regularly; by looking for opportunities to capitalize on investment losses and reallocate assets year-round, he said his firm has managed to increase clients’ after-tax returns by up to 2%.
Transaction costs are another factor. According to Schachtman, active investment strategies could be harmful because costs from taxable gains, commissions, and wide bid-ask spreads, among others, can quickly erode returns if they’re not managed carefully. “That’s one reason we favour investment strategies that use fewer transactions,” he said.
Finally, he noted the “compounding deficit,” an opportunity cost incurred when dollars that could be growing from compounded interest are instead spent on unnecessary fees and expenses.
“This deficit represents the cumulative effect of all other costs—especially when left unchecked—on the growth of a portfolio,” he said. “That cost might seem more immaterial than others in a given quarter or year, but over decades, it can have a significant impact on returns.”
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One is product fees, which can be baked into certain active investment products. “A growing body of research finds that most US actively managed stock funds fail to outperform their benchmark over extended periods,” Marc Schachtman, founder and CEO of True Wealth Advisory Group, told the Wall Street Journal. “[B]y using passive index funds you’re giving clients a low-cost option that can outperform more-expensive active management.”
Schachtman said his firm also engages in tax-loss harvesting regularly; by looking for opportunities to capitalize on investment losses and reallocate assets year-round, he said his firm has managed to increase clients’ after-tax returns by up to 2%.
Transaction costs are another factor. According to Schachtman, active investment strategies could be harmful because costs from taxable gains, commissions, and wide bid-ask spreads, among others, can quickly erode returns if they’re not managed carefully. “That’s one reason we favour investment strategies that use fewer transactions,” he said.
Finally, he noted the “compounding deficit,” an opportunity cost incurred when dollars that could be growing from compounded interest are instead spent on unnecessary fees and expenses.
“This deficit represents the cumulative effect of all other costs—especially when left unchecked—on the growth of a portfolio,” he said. “That cost might seem more immaterial than others in a given quarter or year, but over decades, it can have a significant impact on returns.”
Related stories:
Educate your clients on these investment myths
CRM2 feeds Canadian fintech and regtech
