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RP: One of the most difficult things for investors to understand is that generally speaking, the less they pay to invest the better. It is, after all, counter-intuitive. With almost every other product or service we buy, the more we pay, the better the quality we can expect to receive. Here’s Neil Cowell from Vanguard Asset Management.
NC: I think, in the world of investing, it can be said that you get what you don’t pay for. Costs do create an inevitable gap between market performance and investor return. I think the evidence, again, is very clear when you look at data. We’ve seen some recent data from Morningstar that clearly show that low-cost funds outperform their high-cost counterparts and that alone gives a real indicator of why we attach so much importance to it. In fact, Morningstar actually do use cost as a major predictor of a funds future performance. Every which way you look at it, costs are extremely important to an investors outcome.
RP: To appreciate quite how much you pay to invest, you need to understand the power of compounding. Say, for example, you’re paying a total of 2% a year. That seems like a modest amount. But remember, you pay that amount each and every year. Over 30 or 40 years, that can make a huge difference.
NC: When people see funds priced at 1% p.a. and another fund alongside it maybe priced at 50 or 60 basis points, it doesn’t seem a lot in terms of the differential. But, when that’s actually compounded over time, with market return and the impact of that compounding effect, it plays a terrific part in the overall return and takes quite a significant chunk from the final value.
RP: Of course, you also need to factor in the cost of financial advice. Cost-conscious investors may be tempted to manage without an adviser. But Vanguard says that’s often a bad idea.
NC: Clients are better served by working with an advisor. We spend a lot of time promoting the value of advice. We have a framework here that we call Advisers Alpha, which talks specifically around the value that an advised relationship will deliver over and above what a client left to their own devices might achieve. So, we don’t say that's for clients who have time, willingness and ability to self-serve that they can’t achieve a great outcome too because that’s certainly possible. We just say, it’s hard and our message around the value of advice and what that adds is really very clear.
RP: So, keep costs your low. But remember, a good adviser can add substantial value. You should, therefore, be wary of trying to manage without one.
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