To Paul Farrell Market Watch June 2007

Posted by Eric Solis on October 20, 2009 under Saving & Investing | Be the First to Comment

I will buy your book and your RoR analysis. But, may I suggest that your rebuttal misses the point. I agree with you from a quantifiable and static approach of looking at rate of return. Clearly 10%-.15% is better than 10%-1.5% all things being equal. It does not take a lot of brain power to agree with that. But making RoR the central issue relating to costs and fees ignores the qualitative and dynamic issues that pertain to wealth accumulation and economic inclusion. Wealth accumulation is about core=commitments, vision=financial security, strategy=financial instrument and report=RoR.

In my view, the “percentage of assets under management” debate is absurd. It is a calculation for the rich, not main street. What is relevant is helping folks understand the concept of “marginal utility value” like electricity to stay warm versus the marginal value of operating an electric razor.

There is a real dollar cost of technology, legal, accounting, transfer, clearing and settlement and these systems are the gateway to economic prosperity and freedom for the middle and lower classes. Just as if they were starting a business, consumers must invest in the start up costs associated with building wealth.

The communistic view that one need not invest, but rather they are entitled to receive the best price is delusional and destructive (in my

opinion) to the long term financial health of our middle class. The issue is democratization through creating supply at market rates, which as a percentage of assets under management may look different than the traditional ratios. But if a person sticks with it long enough they too will be able to dictate the terms that they are willing to pay for the marginal value delivered over and above the fixed cost to maintain their account.

In closing here is an example:

$1 invested everyday for 67 years at 10% grows to $1,000,000 (est.). If the fee is $52 a year they will pay a total of $3,484 dollars over the

67 years. Yet, each and every year they paid 14% of the amount invested in fees. Is this smart?

The $52 is the utility value of saving and aught to be viewed as consumption in the early stages. But over time the ROI on the fees makes really good sense.