Why do investors pay for inferior returns? We can do better. How?

Timothy A. Brown, FRI
CEO www.roicorp.com

One of my clients asked me the other day if he thought my traditional brokerage service would be under threat because of all the developments in technology. Just look at travel agents. Who really uses them anymore?

How about the financial services industry? Everybody could buy and sell their own stocks using a do-it- yourself direct investment account. Why would the traditional full-service, full-fee financial advisor/stock trader stay in business?

Circling back to my industry and using the residential real estate as a close parallel, why is it that traditional real estate agents continue to earn 5% of the sale of over 97% of all Canadian homes? There are all kinds of self-serve websites. With all the advent in technology and social media, it is quite easy to market a home and it has been a seller’s market for several years, so why are people still paying 5% to have their house sold?

My industry is very secure and not necessarily easily disrupted by technology, but of course I am biased, and I am a traditionalist, and I am obviously going to defend my company, our fees, and our future business cycle.

But the purpose of this article is to talk about the financial services industry. When they produce exceptional returns, I would be more than happy to pay them their traditional percentage to manage my money or buy and sell my stocks and bonds and other entities.

The problem is that all statistics show that the best investment managers rarely, if ever, beat the indexes. The most reliable index is the Standard & Poor’s 500 and that can be easily bought and sold via exchange traded funds, which any individual investor at any age can buy within minutes. No advice is required to buy the top 500 companies in the United States of America. None!

So why do we pay the players of this industry when the advice of the experts produces less than what we can achieve on our own? Why do they stay in business? Why do we continue to pay them? They do nothing for us and in fact, they are doing more damage to our financial portfolios than good. It is habit and fear. Nothing more, nothing less.

If a real estate agent sells your house for far more than you expected and you are thrilled, the 5% does not mean anything any longer.

If a dental practice broker sells your practice for a record amount, the 10% charged would appear nominal (and it is tax deductible) and you should be happy.

While no one in any brokerage can guarantee a result, such as real estate, stocks and bonds or my industry, I can tell you that if somebody is creating value for you, pay their fees happily.

If somebody is doing a disservice to you and costing you money, I do not understand why you continue to pay them.

Dr. Milan Somborac

The Monday Morning Millionaire Program supports do-it-yourself (DIY) investors which I have been for over 50 years. About my team and me