By: Laura Walton AFC®
“Managing money is the most profitable business in the United States.” Jason Zweig pulled this quote for his recent Wall Street Journal article from a 1996 speech made by Arthur Zeikel, then president of Merrill Lynch Asset Management.
Zweig’s article, “Financiers, Heal Thyselves,” applauds the recently announced pact by Jeffrey Bezos (Amazon), Warren Buffett (Berkshire Hathaway) and Jamie Dimon (JPMorgan Chase) to improve health care by offering “simplified, high-quality and transparent services at a reasonable cost.”
However, Zweig’s next sentence reads “Darn it. For a moment there, we thought you were talking about cleaning up the investment business, perhaps the only area of the economy that can rival health care in complexity, low quality, opacity and unreasonable cost.” Touché!
I encourage you to follow the link and read the article – it’s short and enlightening. I’ve taken the liberty of quoting key points below:
Complexity: As of the end of 2016, 8,066 mutual funds came in 25,109 share classes. And, did you know that 3.2 million indexes track financial markets world-wide?
Quality: Four out of five mutual funds fail to match the performance of the market they are purporting to invest in. Studies over decades suggest most professional managers underperform while still charging higher fees.
Transparency: It’s frustrating, time-consuming and too often impossible to determine what fees you’re paying in your employer’s plan. Annuities are sold with confusing charts of hypothetical returns and fees that are hard to find and interpret.
Cost: One professional characterized the reporting of costs as “convoluted and spotty.” Circling back to Arthur Zeikel’s quote, Zweig points out that as of December, investment management firms enjoy an average net profit of 24.1%, second only to tobacco companies in the 142 industries tracked.
We share a Warren Buffett quote in our 3rd Decade classes: “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”
I’m pulling for the Bezos-Buffett-Dimon healthcare team and, at the same time, hope they read Jason Zweig’s article!