You Are Overpaying for Money Management

From MarketWatch: You’re overpaying for money management

But if you want them to get the real message behind money management, tell them a lot of investors are overpaying for what they think is low-cost money management.

This week, Burton Malkiel, author of the influential book “A Random Walk Down Wall Street,” penned an op-ed piece for the Wall Street Journal (You’re Paying Too Much for Investment Help), in which he rips the mutual fund business for overcharging customers for active management.

He’s right, of course — thus the cheers — but investors already knew that, which is why virtually all money going into funds today is headed for low-cost issues, index and exchange-traded funds, or into institutional share classes that are now made available to many investors through retirement plans.

But he’s also wrong, to a degree, because in his piece, “paying too much for investment help” meant “buying costly actively managed mutual funds.”

Malkiel — like many others — is beating the drum for index investing, saying (again) that passive, broad-based market index portfolios have “substantially outperformed the average active manager since 1980. Therefore, the increase in fees likely represents a deadweight loss for investors.”

There’s no denying that case. Quarreling with low-cost investing is like arguing against motherhood and apple pie.

But in today’s investment world, many individuals are paying someone to actively manage their passive and low-cost mutual funds. Throw that fee on top of the performance record of the passive funds, and that margin of victory becomes razor thin or disappears altogether.