Nobody likes to feel they have overpaid for a product or service. We want to believe we have received value for money.
With a product, it is relatively easy to decide whether it represents value for money - if it looks like it's going to fall apart after a few uses, we will only be prepared to pay a small amount. If it is well-made, and consists of quality materials, we'll pay a bit more.
But how do we decide whether a service represents value for money? How much is a reasonable amount to pay for someone's advice, or for an hour of their time, or for their expertise and knowledge?
A 3-4 per cent commission for selling our house might seem reasonable if the agent advertises our house, holds open homes and shows a lot of people through. But we'll feel less happy about paying up if our house sells on the first day it is listed without the agent having to do anything.
We have the same dilemma with investment advice and investment management. A 1 per cent annual fee for an adviser to review our investment portfolio might be fine if every year our portfolio increases in value by 10 per cent.
We will be happy to pay our fund manager a 1 per cent annual management fee if he/she generates investment returns ahead of the market. But if we have a negative return, or if we just do as well as the market overall, it is natural to feel we have been overcharged.
Some suggest all investment services should have the same low fee structure but that is not necessarily the answer. That suggestion implies all investment services and decisions are created equal. They're not.
No two investment managers or advisers are the same and you don't always get what you pay for. When it comes to investment talent, it can make sense to pay more in order to get access to the best.
You could choose a passive share fund whose returns match the market without any active decision-making - and pay a management fee of perhaps 0.5 per cent per annum.
However, this low fee will not necessarily guarantee better returns than an active fund with an annual management fee of 1 per cent and a 20 per cent performance fee.
Similarly you could choose a KiwiSaver fund for its low monthly administration charges but you may find that the service and communication you receive each month is minimal because the low admin charges don't cover the costs involved in providing client service.
It is hard to know how much is too much. But that is probably the case for most services.
Unlike a product where you can assess the value of its components, a service requires an assessment of intangible factors like: does it meet my expectations, does it make me feel better, and do I feel comfortable with the person providing the service?
A haircut is a haircut but I might be prepared to pay a little more to have a hairdresser who gives me a head massage and tells me honestly that I can't look like Jennifer Aniston.
I have always suggested clients ask themselves whether they feel they have received full service. If their adviser kept them informed, structured their portfolios to suit their goals and risk profile and reviewed their affairs regularly, they probably earned their fee, even if the returns were not always market-beating.
A recent American study suggested the key benefits that investors enjoyed in using an investment adviser were the 'hand-holding service' and the 'shield' an adviser can provide against an individual's own decisions. The shielding referred to the propensity of many investors to trade too often, transact at the wrong times and 'lose their bottle' in trying market conditions.
The fees of an adviser or fund manager should not be considered in a vacuum. The reasonableness of the fees must be viewed in the context of services provided and progress made towards your goals and objectives.
You don't always get what you pay for. Sometimes you get more. When it comes to securing your investment future, cheapest does not necessarily mean best.
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