Wall Street’s Secret? “Where there is mystery there is margin”.
The more the financiers of Wall Street can make investing sound complex and mysterious, the more they can promote their mysterious high-margin solutions. The greater their margins, the greater their profits. Now don’t get me wrong. I have no problem with anyone earning profits. Profits are at the core of capitalism’s engine. However, as a buyer of financial services, it pays to be very careful about where you are investing your hard-earned wealth.
Some of the most egregious products sold to investors are hedge funds, as well as hedge fund “fund of funds,” venture capital pools and variable annuities. In my experience, these products are mysterious by design. They are also expensive (generally charging 2 percent of the account value per year PLUS 20 percent of profits earned). That’s right, 20 percent of the profits on top of their fees–and their results are generally sub-par. In addition, there is substantial evidence to suggest that the results generated by hedge funds and related “mysterious” products aren’t worth their costs. Other than that, they are great! If you need more convincing, or if you’re interested in reading more about the subject, I recommend Simon Lack’s book The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True.
Perhaps, it’s no coincidence that hedge funds and related products are most often sold by investment professionals who are not fiduciaries. In short, these so-called professionals do not work for the client. Instead, they work for the firm that is promoting the product. That’s a huge difference because it makes the client simply a distribution channel for the products they’re selling. No rational investor or saver wants to be thought of simply as a product distribution channel. Don’t fall into that trap. It can be very expensive and it won’t get you to your financial goals.
Real world example
We once helped a prospective client save more than $100,000 a year in expenses simply by identifying the costs he was paying for esoteric investment products and by proposing solutions that maintained the same portfolio characteristics he wanted from the complex products–but at a much-reduced cost.
In the vast majority of cases, when we evaluate a portfolio for a prospective client who owns complex investment products, we find that we can build the same type of portfolio, with much lower costs, by using straightforward low-cost index funds and other passively managed funds. That may sound boring to some, but it is a highly effective approach that has stood the test of time.
- Always make sure you are treated as a valued client—not as a product distribution channel.
- Hedge funds, venture capital pools, and variable annuities are designed to sound mysterious and complex. They’re more expensive than plain vanilla index funds and often underperform.
- Research confirms that “boring” passively managed funds are highly effective for getting you to your financial goals—and save you money every step of the way.