Are You Addicted to High Fund Fees?

We all know this person: the shopping addict. Always snapping up the weekend paper for the department store circulars. Heads out to the mall before it even opens.

The thrill of the hunt is part of the reason shoppers love to shop. They know that clothing and electronics are overpriced, then artificially marked down.

They know that 70% off does not even approach the cost a retailer likely paid for a pair of shoes or a new laptop.

No matter. If it can be gotten at the right price, and especially if it’s the last one on the shelf and just the right color or specs, it’s a score.

Scientists say shopping pleasure is due to our brain’s dopamine receptors. Brain science is complex, but the simplified version is that our brains use dopamines to reward learning.

It’s how we survive as species. It’s also how addictive drugs work, by tricking our brains into greatly increasing the flow of these rewards.

Oddly enough, marketers know very well that price is a signal in two directions: We won’t pay too much for some products, while others have tremendous price elasticity. For a small number of goods and services, we irrationally believe that high price indicates high quality.

Wine, perfume, watches, anything that hints of an artisanal effort can be priced higher than normal, even to silly levels if scarcity is a factor.

What does all this have to do with investing? Glad you asked.

Investing costs are priced in a very misleading way. We tend to believe, on the one hand, that “you get what you pay for” when it comes to financial advice.

At a certain level and in certain areas, this is true. A multimillionaire looking to defer income and thus pay lower taxes will pay quite a bit of money for that kind of advice. There are many laws to consider, many assumptions and “moving parts,” as well as familial concerns.

Likewise, corporate stock owners who must navigate tricky insider-trading rules and lock-up periods often benefit from personally tailored advice. It just makes sense.

Retirement investors, on the other hand, need very simple counsel: Save more, invest in a diversified way, defer taxes and maintain discipline. It’s the kind of help that, frankly, is one-size-fits-most.

“Most” because not everyone is the same age, with the same investment horizon and the same risk tolerance. Nevertheless, the variety of strategies here is not infinite.

Fund fees vs. return

So why does Wall Street price fund fees so high? Partly, because of the mystique. As along as investing can be made opaque and appear competitive, pricing power remains in the hands of the seller.

Once retirement investors realize that they’re being sold and re-sold the same five to seven investment approaches, over and over, at too-high price points, the fund fees game is up.

Investors have come to realize that beating the market is impossible if the cost of trying greatly increases one’s risk of falling behind the benchmarks. That is, in great part, why so many investors have moved on to exchange-traded funds.

The key here is to get “risk-adjusted return,” that is, to make steady money in all markets and let compounding, rebalancing and low cost turn pennies into dollars over time.

Ask yourself this the next time you tune into the screaming matches on financial cable TV or feverishly watch tickers on your smartphone: Are you getting what you pay for in terms of security and total return? Or simply feeding an addiction?