Costs and Taxes Matter

We believe that the erosion of returns caused by transaction costs, management fees and tax exposure is far greater than most investors realize.

Costs

Controlling costs is essential to producing desirable investment outcomes. Simple arithmetic explains that market return minus costs equals net investor return. Therefore, by reducing costs, net investor returns are effectively increased. The problem is, most investors do not realize the extent to which fees are being incurred on their investments and consequently decreasing potential returns. This is critical because a difference of 1% in annual fees, for example, can be translated into hundreds of thousands of dollars in foregone returns over the long term. Consider the following chart:

Both cases start with an initial contribution of $500,000 and receive a hypothetical 7% annual return before expenses (this is not representative of any investment in particular). The investment represented by the blue line has annual expenses of 1%, while the other investment has annual expenses of 2%. After thirty years, the difference accumulates to over $700,000.

It is important to note:

• Our management fee structure is completely transparent. We do not receive payments from anyone other than our clients thereby aligning our interests with theirs.
• We utilize no-load, passive, structured funds and their expenses are typically one third of comparable actively-managed funds.
• Structured passive funds tend to have much lower turnover ratios (the percentage of holdings that are bought and sold annually) which significantly reduces the transaction costs that are ultimately passed on to the investor.

Taxes

While it’s possible that Benjamin Franklin may have overlooked a few things when he wrote that “in this world, nothing is certain but death and taxes,” those two items require our attention. We believe that by accepting and planning for these certainties, investors can spend more time focusing on the things that truly matter to them.

With our expertise in personal and estate taxes, we integrate key tax issues when preparing a financial plan. Often seemingly attractive investment strategies have hidden tax consequences that significantly alter their relative performances. By strategically allocating assets among taxable and non-taxable accounts and recognizing opportunities to capture the tax benefit of losses (tax loss harvesting), we are able to lessen the impact of unavoidable taxes. Our focus is on after-tax growth of wealth rather than phantom gross gains.

Next: Risk and Return are Related