A commodity is something usually uniform in quality between companies that produce or sell it. You cannot tell the difference between one firm's product and another. When dealing with a commodity, the price is the only thing that might be different. In fact, it becomes all important. Why buy a bag of sugar for two dollars, when you can buy the same bag for a buck?
A specialty item, by definition though, is special. You can’t just get it anywhere. The quantity is limited; therefore, the price is usually higher. Not all specialty items are worth the price, so every consumer must decide for themselves.
The financial services industry can be divided into two different camps, as well – they may represent two different sets of target clients.
Let’s call the first group the do-it-yourselfers. Do-it-yourselfer financial service firms are like Menards or Home Depot. They promote the idea that you can do certain projects - home or financial, yourself just as well as anyone else can; and you can save money by doing so. So, the price comes up over and over again in their advertising.
Do-it-yourselfer financial firms promote the idea that all investments boil down to a few basic elements than can be easily understood and manipulated. Therefore, low price and ease of service, cool websites and mobile apps become paramount. Advisors, in this world, represent an additional expense with no perceived value in return. After all, you can do it yourself.
The second segment of the financial services world is the do-it-with-help crowd, using an advisor.
Neither approach is right or wrong, but they are fundamentally different and I believe that they are for fundamentally different people.
It is mathematically true that fees can erode the performance of an account over time. But I think real life tells another story.
If an investor or a retiree today is in bad shape, it is likely not because they have paid high fees.
They often are in bad shape today because they (a) failed to start early enough; (b) failed to save enough; (c) failed to have an investment plan. They may have a collection of investments they were either sold or which they bought because they read an interesting blog post; (d) they sold out when they were scared; (e) they kept buying when they shouldn’t have, because “this time it’s different”; or (f) they bought when everyone else was buying and sold when everyone else was selling – which means that they followed the crowd.
In my experience, a mediocre investment with higher fees combined with good discipline, meaning good investor behavior; may far outperform the best performing investment with the lowest fees in the hands of an undisciplined investor.
Don’t be so focused on the gnat of fees that you let the elephant of bad behavior step on you.
Pick the advisor you like and pay the price. See the big picture. Don’t miss the forest for the fees.
