Costs are as bad as poor returns for your financial health

If you were told that a smoker would die on average ten years younger and more painfully than a non-smoker, would you do it? Some would take that chance just for the short term pleasure of living for the moment as it were. For others that’s a ridiculous idea, to intentionally raise the risk of shaving a decade off one’s life.

And yet, people ignore how harmful costs are to their financial health. They think nothing of paying 18% interest when they don’t settle their credit card bills. Where can you get a stable 18% returning investment today? Well, that’s what credit card companies are getting from non-payers.

They gloss over the fact that they pay fund managers the equivalent of maybe close to 20% of long-term expected returns on funds they buy. They are liable to pay maybe half of one year’s returns to the person who sells them investments. Fees are perhaps the new cholesterol (which apparently is no longer on the naughty list for heart health some research say) for investments.

By the way, 20% of your returns per year vanished to fees result in one-third less in your wealth at retirement, assuming saving over a 30-year career.

The irony is that smokers know more about what they are getting into than say a unit trust investor or an insurance policy buyer. Financial product consumers think that that’s the way it is, that it’s either existing offerings or doom. They think that paying these costs are part and parcel of what people do.

Well, it is but not everywhere.

In the US, people have poured $3 trillion into exchange-traded funds or products. They realise that smoking and high-cost funds are bad. Of course, much of the money goes into highly speculative trading but it’s undeniable that cheap ETFs are becoming accepted as an excellent way to invest when you have, say, the Vanguard funds charging you fees of 0.2% and below with zero sales commissions.

In the Malaysian insurance industry, people are also waking up to the fact that they don’t have to pay 171% of the first year’s premiums in commissions (paid over a few years). Savvy insurance buyers are flocking to plain vanilla term policies where premiums are a few bucks and not a few hundred a month. The savings can then go into long-term investments, powerfully establishing a kind of self-insurance for the future.

Of course, nothing comes for free. Salespeople and agents who tell you stories about financial products or supposedly advise you need to be paid. Some agents are worth their salt. But this is where you have to decide whether a high-quality advice was given.

But something else radical is happening. The innovation in the digital economy today is enabling informed decisions cheaply. It is making people question the very definition of what ‘advice’ is when you pay only 0.2% a year or less for your investments rather than a one-time 5% sales fees plus 1.5% management fees a year.

There is also rising awareness of fee-only advisory. For instance, paying RM1,000 (please feel free to replace with a more relevant currency of choice) for 3 hours of financial advice is equivalent to paying 5% on a RM20,000 investment based on existing expensive commission models. But in the fixed fee model, you are charged the same advisory fee whether the investment is 20k or 200k. Further because of the fixed-fee model, the financial planner or advisor isn’t motivated to push only the most profitable products.

13 thoughts on “Costs are as bad as poor returns for your financial health”

  1. Hi Julian, a very good article. What are your thoughts on wrap accounts by financial advisory firms in Malaysia where they charge 1% to 1.5% of the total invested amount a year. As they do advise a lot of customers to go for a balanced portfolio of 60% Equity and 40% Bonds at an assumed return of 8% for equity and 4.5% on bonds that would be an expected return of 6.6%, at 70/30 6.95%, at 80/20 7.3%. After deducting fees of 1.5% we would be looking at real returns of 5.1%, 5.45% and 5.8%.

    That’s a lot of money for basically not much work done in a year and at that sort of returns you may as well put your money in EPF and get a guaranteed 2.5 and perhaps 6% if you’re lucky. Perhaps my numbers or logic is flawed but what would be the case for letting an advisory firm manage my money if that is the case.


  2. Excellent piece, Julian.

    I’ve been following many financial blogs from the US. It’s amazing to read about the choice of low cost index fund that is available to them particularly the Vanguard funds whose expense ratio is so low, compared to the ones we are left with which is around 1.3% to 2.0% or more.

    I’m searching for low cost index funds to invest in. I have found three but i believe they are only available to invest via Spore brokers, for e.g.: OCBC Infinity Investment Series – US 500 Stock Index Fund.
    Even then, its a feeder fund and the expense ratio is alot higher than the mother fund, which is a Vanguard Fund.
    Do you know of any index funds to invest in Malaysia? How do we get access to low cost index funds in the region?

    Also, on the ETFs listed on Bursa Malaysia, it appears to lack liquidity. Your comment on this, please.



    1. Hi Gina thanks for dropping by. Actually instead of buying index funds which are scarcely available where we are, you can open a share trading account with access to international markets e.g. with Rakuten that will allow you to buy into high quality ETFs. Access to singapore and hk alone gives you practically access to the most relevant ETFs which fulfill the same function as index funds. Vanguard has already started trading on hkex.


      1. Thanks Julian.

        Yes, its such a shame we dont have access to index funds in Msia. You may invest in Vanguard Singapore funds if you’re an accredited investor in Spore. But that’s a different story altogether.

        However, i read about a number of ETF which have been delisted from SGX recently. There’s also the issue of syntetic ETFs which do not invest in the underlying securities but instead make use of derivatives products instead which carry a significantly higher risk.

        How do you recognise good quality ETFs?

        Thanks for taking all the Qs, Julian. May i also suggest a post on how the ordinary Malaysian can invest for retirement using low cost instruments and diversification. Traditionally we have been relying on EPFs, FDs and properties but i believe that’s not enough for retirement.


      2. On the delisted ETFs, they are a few of Deutsche Bank’s x-trackers. I’m not recommending buying into synthetics but DB was very fair in paying back the ETFs fair valuation. The closing down doesn’t mean investors lose all their money, it means they don’t want to manage that ETF anymore perhaps due to poor response.

        You are right that synthetics don’t buy underlying securities. They are mostly governed by EU ‘UCITS’ rules which require collateralisation to the extent of more than 100% of the ETF NAV by high-quality securities and which have to be topped up in any shortfall. If trouble hits the fan, your exposure is the difference between yesterday’s collateral value, consisting of very high-quality securities, and today’s ETF NAV and the ability of the manager to top that up. My guess is that in a crisis, the EU will quickly move in to protect holders by calling on collateral and closing the fund.

        I do hold synthetics but I guess if you wanna sleep well at night, you might want to limit your holdings to just “physical” ETFs which buy the underlyings. Well-managed physical ETFs have low costs and low tracking errors.

        Thanks for your suggestion for a future post 🙂


    2. Also on Malaysian listed ETFs I’m not too hot on them because they are based very narrow indices. I prefer very broad regional of global ETFs which take the guesswork out of which theme is the flavour of the month. If you had to buy a Malaysian listed ETF get the broadest non-ringgit one for diversification.


  3. Well written. That said, good vs bad fee based financial advice is also not easy to establish or verify because there are no industry rating scores and there are too manuy moving parts in a holistic plan. Asking people to go passive and buy ETFs only works for developed market funds. For EM markets, active management is required if you eish to outperform the benchmrk and peers.


    1. Actually ETFs work for any markets that have benchmarks and EM is no exception. what i’m saying is that if you accepted benchmark returns according to your risk-profile, you might do better than paying for expensive funds which you have no certainty whether will outperform or not.

      on advice, what i have in mind is that this should be based on matching the long-term risk-return behaviour to your financial needs rather than someone telling you what will go up or down in the next month or year or 3 years.


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