Once, there was a Tow-Kay.
From humble beginnings, he built 10 listed companies, spanning across multiple industries.
Upon passing, he left all his shares in the 10 companies equally to his 10 grandchildren.
Collectively, they inherited a 60% controlling stake in the entire conglomerate.
After inheriting, the conglomerate earned $100 million in its first year. Thus, the family’s share in the conglomerate’s earnings would be $60 million, split equally among 10 grandchildren.
In the next few years, the conglomerate continued to raise earnings. Thus, the family generated more earnings, thus, becoming wealthier.
Helper in a Clubhouse
One day, Ben, one of the grandchildren, was playing golf in a country club.
He was playing alongside Mike, his best bud.
During the game, Mike shared how Ben can potentially make more than his siblings and cousins. This is done by selling some of his shares in a few companies (those with less growth potential) to his siblings and cousins in exchange for their shares in other companies (which he may think) that have greater growth potential.
The family still retains a 60% controlling stake in the conglomerate.
The difference lies in who owns what and how much.
Mike offers Ben to broker this deal.
Sensing an opportunity to become richer than his siblings and cousins, Ben agrees.
Upon this transaction, the conglomerate earned $200 million.
The family’s share of the earnings was $120 million less brokerage fee (paid to Mike).
Let the Competition Begins
Ben’s siblings and cousins know about this.
They don’t want to sit still and let Ben “outearn” them.
A few outsmarted the rest in this game and started to make more share of the earnings.
The rest were not happy about it and needed a solution out of it.
That solution came after they met up with Alex, a professional in this game.
Alex suggested they pool their shares into a fund and he would do all these ‘buying & selling’ on behalf of them so that they can outperform the few who outsmarted them.
To participate, these siblings and cousins agree to pay an upfront sales charge, annual trustee & management fees and a performance fee to Alex for his mental-effort to service them.
Upon this transaction, the conglomerate earned $250 million.
As a family unit, they still retain the same 60% stake in the conglomerate.
Their share of earnings was $150 million less Mike’s brokerage fee and Alex’s brokerage fee, plus sales charges, annual trustee & management fees and performance fees.
Better than Alex
Although Alex was not bad, a few grandchildren think that there might be a few more pros, who could deliver better results than Alex.
But, they may not know who might be “these few pros”.
Hence, each of them engages a planner or an advisor to help them find these pros.
In search of better returns, they are willing to pay fees to their planners and advisors.
Upon this transaction, the conglomerate earned $300 million.
As a family unit, they still retain the same 60% stake in the conglomerate.
Their share of earnings was $180 million less Mike’s brokerage fee and Alex’s brokerage fee, plus sales charges, annual trustee and management fees and performance fees and also fees arising from finding professionals by planners and advisors.
Fees – The Deterrent to Stock Returns
The above is a recreation of writings of Warren Buffett in his shareholders’ letter 2005.
A similar writing is published in “The Little Book of Common Sense Investing” by John Bogle.
Of which, the golden nugget of investing wisdom is this –
Returns come from corporate earnings, which is generated from production of value.
Fees diminishes earnings. So, the goal is to minimize transactions and save costs.
Less helpers, less transactions, less fees paid and thus, allowing us to keep more profits.
But Still
Despite Buffett and Bogle’s wisdom on this, the desire to beat siblings and cousins are universal in the past, present and in the future.
The desire to earn more, be better and win will remain present and alive.
This creates two powerful emotions in the markets.
The first is a greed to beat others.
The second is a fear of losing to others.
Because of this, I believe such creates a multi-billion dollar industry in wealth management.
There will always be demand to outsmart / outshine / outearn their siblings and cousins and the price they are willing to pay is an abundance in fees.
So, How to Minimize Fees?
I believe the first step is to realise that “more fees paid doesn’t mean more returns”.
There are many instances where investors keep more earnings by reducing fees.
Reducing fees is part of building a winning portfolio.
To do this, we need to realise that wealth is built from long-term compounding earnings. Hence for investors, it’s about learning how to invest and own businesses that can compound earnings over time.
In many ways, education is key to reducing fees and keeping more shares of earnings.
If you are into building portfolios that compound wealth without paying hefty fees, check out a free online webinar as follow:
