The Missing Questions

One of the professional publications I semi-regularly read is Financial Planning. A little news item in the August 2006 issue caught my attention. A company that regularly surveys and researches the investment industry asked advisers how they choose the mutual funds they use. I looked down the list of responses to compare how I would have answered such a survey. The factor cited by most respondents as extremely important (59%) or somewhat important (39%) was whether the fund had a consistent style of investing. Sure. I can buy that. I proceeded to look down the list of other factors. What struck me were the factors that were missing. Not mentioned was whether the fund had a sufficiently high front-end load. I’m sure a number of advisers (using the term in a liberal fashion) count that high on their list. More importantly, also missing was whether the fund had low expenses (low expense ratio and low portfolio turnover). Low costs to my clients are very high on my list of important factors. Yet, this factor was completely absent from the survey. It wasn’t even a write-in candidate.

Any smart investor faced with the choice of Fund A or Fund B that are the same in all respects other than annual costs will choose the fund with the lower cost. Why? Because they learned in first grade that a 1.0% annual cost means 1.0% less goes into your pocket. Compound that over a lot of years and you come up with a significant number. Costs do matter – whether advisers consider them important or not.