Nobody ever asks: How many fees are there for the same or similar investment product?
Well, you might if you're a securities regulator, a U.S. Senator from Massachusetts, an investment nerd, or an investment advisor.
I believe nobody asks because one's mind might be blown over the complexity of how investment products are created, wrapped, and sold to investors through various channels.
Instead of getting too deep into investment products, let's look at how sneakers and suitcases are designed, made, and distributed. Then we can look at a list of investment products that might be managed (created and designed) by one person or team and then ultimately compare it to a cup of coffee.
Sneakers First
A friend of mine is a product specialist for a world-renowned sneaker company, and he works with designers and manufacturers to make slight tweaks to the same sneaker to sell into different stores and markets.
Have you ever noticed that the same brand of sneaker has different price points in various retail stores?
Have you noticed they look almost the same?
In some cases, the same or similar sneaker may have different names in different stores.
Well, the sneakers are probably the same with some minimal differences. You might find, for example, the highest quality sneakers sold in the company's brand showcase stores, while less expensive sneakers are sold in an outlet store or a discount store.
Yes, you might notice some differences, like the size of the logo, the number of eyelets on the shoe, or the shoe's fabric; however, it's essentially the identical core shoe. Chances are the shoe was initially designed by one designer or team of designers and produced in the same factory.
Next, Suitcases
Many luggage companies do the same thing. I remember conducting 401(k) employee education meetings at a suitcase company in Rhode Island. I was given a tour of the facility and shown how they made their products and tweaked them for different distribution channels.
I was amazed by what they called a "private label distribution" channel. That's where the company makes the same core suitcase and slaps another company’s name on it, e.g., the store's name that was selling it. This gives the impression that the store was the manufacturer, the suitcase is unique, and you can purchase it only at that particular store.
Now, what's the benefit of doing this? Consumers have different preferences. Some feel a sense of prestige when buying top-shelf items, and others want to feel like they got a great deal or a better product than someplace else. Many consumers like shopping at specific stores, while others prefer shopping around for an item.
The marketplace, the shoe company, the shoe industry, and the stores know this. Sometimes, even the consumer knows this.
Companies tweak products and use different distribution channels simply to make more money. Think about it, tweak this, tweak that, and make millions of more dollars.
Why not?
Investment Companies
Investment companies do the same thing.
Investment products are created, marketed, and distributed similarly.
These firms, too, make millions of dollars selling investment products through different channels so they too can reach their consumers.
After working for years at a few major investment management firms to create, maintain, and distribute these products into the marketplace, I was struck by how one person or team could manage dozens, if not hundreds, of accounts using one core portfolio.
That’s right.
You see, to create all the various deviations of one product, they too have help, which might include product specialists, quantitative associates, sub-portfolio managers, product teams, marketing associates, distribution companies, sales teams, and legal teams working with them, their company directly, their affiliated companies, or their outside distribution companies.
To illustrate the scope of the various ways to sell a single investment product, here's a list of potential product names or umbrellas that might sell the same core portfolio:
- Retail mutual fund
- Institutional mutual fund
- Advisor sold mutual fund
- Zero revenue mutual fund
- Commingled Pool
- Privately Managed Account (PMA)
- Separately Managed Account (SMA)
- Collective Investment Trust (CIT)
- Private Label Fund
- Equity Traded Portfolio (ETF)
- Institutional Separate Accounts
What’s impressive is that one mutual fund may also be broken down into different share classes(1), so one can charge different fees based on how it's sold to the marketplace.
That’s why we read so much today about holding financial sales associates to higher standards through new fiduciary regulations.
It’s very complex. Fortunately, I've been able to leverage my experience creating investment products and my knowledge and ability to explain client fees to determine the most appropriate product for a client. It seems my depth of skill here may be useful.
This complexity is also why regulators, elected officials, and others are concerned about the investment industry. The average person--sometimes the average salesperson--does not understand the various ways an investment product might be sold.
Coffee?
After that, you might like to get a great cup of coffee, which we can buy from the grocery store and make ourselves. Or, we can go to Starbucks, McDonald’s, or a local coffee shop and drink it from a paper cup. We can even go to a fine restaurant and have it served in fine china.
That said, even the price of coffee might be mysterious. I just tried to find out how much a cup of coffee is at the Four Seasons in Boston. What popped up first in my web search was their in-room dining menu, which didn't even list the price of a cup of coffee.
Surprisingly though, I learned coffee is included with their Back Bay Breakfast: two eggs your way, choice of breakfast meat, toast, juice, and coffee or tea for $35.00.
Final Thoughts
That's all to say that even a product as simple as a cup of black coffee can be tweaked, served up, and marketed/labeled in a myriad of ways to result in a broad spectrum of price points to meet consumer preferences. Given that, it's no surprise that investment product fees are complex and convoluted.
If you’re confused about investment fees, make sure you sit down with someone with a depth of industry experience, maybe even over a cup of coffee; otherwise, put on your sneaker, pack your suitcase, and find someone who can answer these two questions:
- Can you show me and explain all the fees in the prospectus (if a mutual fund or registered product) or legal document I might be paying?
- Can I get this product or fund in a less expensive product format, like an institutional fund or another retail fund, maybe even a different share class?
If they can not answer these questions clearly, keep your sneakers on and find someone else.
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(1) Mutual funds often offer several share classes to investors. Each class invests in the same portfolio of securities and has the same investment objectives and policies. However, their fees and expenses differ, which impact their performance. Other parameters, such as initial investment amounts, may differ as well. (definition source: Investopedia)
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks, including possible loss of principal. Any opinion expressed in this article is solely that of the author, and not that of LPL Financial, Inc. nor Northeast Planning Associates, Inc.
© 2022 Robert Kratzer Everett All Rights Reserved