One of the things that I try to do every weekend is catch up on my reading. In today’s ever-changing world, nothing ever seems to remain the same. In doing my reading I came across an article that had me shaking my head. The article dealt with pension plans and the fees that hedge funds and other types of investment companies charge to manage these accounts. According to the article, the fees that pension plans think they pay is less than half of what they actually pay. In fact, the article quoted the Treasurer who oversees about $30 billion in pension investments. He said, “It’s a mammoth undertaking to understand the complexity of these costs, especially in private equity. We’ve hired a third-party administrator to try to validate fees and expenses and after more than a year-and-a-half, they don’t have a handle on them all.”
I don’t know about you, but to me, something doesn’t make sense. If you hire a private company to analyze fees and after a year-and-a-half they don’t have a handle on all the fees you are paying, it’s a sure sign that you should invest elsewhere. After all, why should it be so difficult to understand what fees you are paying? As an investor, your return is directly affected by fees and that is why it is important to understand what you are paying. In addition, if you’re hiring a company to invest your money and they intentionally hide fees and try to deceive you, why would you invest with them? After all, in any investment relationship, trust and confidence are key; therefore, how can you trust someone if they’re not upfront and transparent when it comes to how they charge you.
As long as I’ve been in the investment world, one of my golden rules for investors is to understand all fees. Not only what it costs you to buy an investment, but also what it costs you to hold and what it costs you to sell. Every independent survey I’ve read regarding fees always reaches the same conclusion, low fees equal high returns. Therefore, why would you invest in a company that has high fees? My general view is the reason people invest in those companies is because they don’t understand the fees they are paying-shame on them.
Whether it is state treasurers or other public officials that invest public pension monies, we know that it’s not their money and they don’t care as much as they should. However, when it comes to your money and how you invest it, you should care. Fees do matter. If you want to increase your return, one of the fastest ways of doing it is lowering fees and costs.
My philosophy is that if you retain the services of a professional to help you manage your money, they should be transparent with fees. You should be able to sit down with them and they should be able to explain to you what fees you are paying in a very simple and straightforward manner. When you hear an investment advisor tell you that you should not worry about fees, or they deflect the question and change the topic, or my favorite is when they tell you that you don’t pay them, the company does, it is a sure sign that you’re paying too much in fees.
When it comes to public pension plans, they should be good stewards with the money; however, the reality is something different. When they make mistakes, the people in charge of the pension plan don’t suffer any consequences. That is not the case when it comes to your money and mine. When we make mistakes with our money the consequences can be severe. Therefore, my advice regarding every investment you have is to make sure you understand all the costs involved. Check them out independently. If you can’t find independent information about the costs that you are paying, I can almost guarantee your costs are too high. The bottom line, if you want to keep more money in your pocket, exactly where it belongs, don’t be like the pension fund trustees, be smarter. Never forget, fees do matter and the less fees that you pay, the more money that ends up in your pocket.