In this weekend's Wall Street Journal, Jason Zweig discusses the importance of being conscious of fees. Our industry has worked towards encouraging managers to be more forthright regarding the impact of fees, but perhaps more is needed.
After-tax returns is an extension of this matter as it provides the investor with greater insight into what they're actually earning. Unfortunately, the after-tax standards first promulgated by the Association for Investment Management and Research (AIMR) and later included in the GIPS(r) standards, only to be scheduled for elimination in January 2011, didn't achieve the attention their developers expected: I think there was a "Field of Dreams" belief of "build it and they will come," but few did.
Investors, especially less sophisticated ones, need to get the full story about what they will end up earning, after fees and taxes are removed. More work is definitely needed here. Glad to see that Mr. Zweig is providing some much needed visibility to this topic.
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Seems you couldn't have picked a better picture for your comment on making the impact of fees (and taxes) more transparent. The poor schnook small investor is sitting in front of a sign that says "brokerage" with the last 4 letters crossed out, so that it simply spells "broke." When I read this, I saw 2 words: "Broke Rage." I thought it was a new psychological defense, like "Road Rage."
ReplyDeleteStill, I think it sums things up nicely. Clients should feel some RAGE because they are BROKE, in large part because their wealth is leaking out of their portfolios and into everyone else's pockets through a variety of fees. You lose 3% to inflation, 2% to taxes (on passive strategies) another 1% - 3% to layers of management fees - and who knows how much else to short term capital gains taxes from trading.
Seems that a little rage is what is needed to get the right performance information to clients. The industry needs to answer THE question: "How much did my wealth change?" If you show this in terms of a return instead of money, then give a return that is a) adjusted for risk and b) after ALL fees and c) after taxes and also d) after inflation. (Inflation? Where did that come from? Well, ask yourself: "Does it matter how much your money buys?") At the end of the day, perhaps we do need some RAGE over the fact that many investors are simply standing still in terms of their wealth, in spite of the fact that their performance reports show them that they are getting ahead.
So, who do you think the performance function really serves: the clients or the fund managers? For all the high ideals of programs like GIPS, it seems clear that we are not serving clients as we should. We can do better and we should.