Bankers Hurt

By Shane Leonard on Mar 16, 2015

Bankers hurt! Cutting fees is as important as saving

Millions of Americans are in danger

Recently, the Center for American Progress, an education think tank, published it’s latest analysis on how Americans are saving. The reading is nothing short of scary. Regardless of the age group, many families are not saving enough. They conclude that:

The consequences of these growing savings shortfalls could be severe for both American families and the national economy.

Is the situation as dire as they write? And is the lack of savings the only problem?

At Stockflare, we think that the savings shortfall is only part of the problem. Yes, families aren’t saving enough. But also, they are picking the wrong investments and paying through the nose for it. The finance industry itself is playing a major role in hurting the retirement savings of every American family.

Just how bad is the situation?

The latest survey by the Federal Reserve points to a complete lack of planning by over 30% of Americans. It’s not too surprising that over half of the millennial age group are not yet on track. But 1 in 4 people in their 30s and 40s have not yet started saving. This points to a serious situation.

alt text

The Federal Reserve also highlights that only 1 in 4 people that are approaching retirement expected to be able to do so. The rest either plan to work for as long as possible or work part-time once they reach 65.

Additional analysis shows that 70% of American families, regardless of their age, do not have sufficient savings to meet their retirement targets. Again the Federal Reserve’s data shows how depressing the situation has become. Even families with savings accounts only have $104,000 as the approach retirement.

alt text

Do the math & start saving

Too often people tell us that life is short. This is plain wrong. Life is rather long, and anyone who isn’t planning for that is likely to have a rather uncomfortable few years before the grave.

Fortunately, math is on our side. Compounding in particular. For example, every $1,000 saved in your mid 20s grows to over $10,000 at retirement, assuming a 6% growth every year. But waiting until your mid-30s, then the same $1,000 will only grow to $6,000. Wait until your mid-40s and each $1,000 saved will compound to just $3,000 at retirement.

Cutting fees is key

But your savings aren’t the only thing that compounds. The fees you pay, compound as well. But instead of helping, they take away from your savings, more and more aggressively, the higher the fees are.

Most people recognise the fee problem. So it’s not surprising that Vanguard has become one of the largest asset managers in the world. Their whole model is based on simple investment products at low fees. They’ve grown in under 40 years to manage $3 trillion of savings.

Vanguard even has a tool on their website highlighting the dangers of paying high fees. They show that over 10, 20 and 30 years, an initial $50,000 investment with Vanguard would pay a remarkably lower quantity of fees. Imagine, using a low cost provider like Vanguard cuts your fees by $34,000 for every $50,000 you’ve saved. That’s $34,000 that goes into your account, not the banker’s.

alt text

The finance industry isn’t helping

When you look how low fees boosts your savings, it’s not surprising to learn that the finance industry doesn’t give Vanguard or similar firms a lot of airtime. Every year asset managers earn $215 billion in fees. That’s money that comes directly out of our savings. High fees exacerbate the savings shortfall.

Worse still, the asset management industry does a terrible job of managing our money. Twice a year, Standard & Poors calculate how many of the professionals succeed in beating the index. It makes for dismal reading. Over a 1-year period 60% of fund managers underperform the S&P 500. Over a 3-year period 85% underperform. Over a 5-year period 87% of asset managers underperform. Worse still, the fund managers that happen to outperform for one period, go on to underperform the next.

A high fee / performance model

Sadly, the asset management industry has proven itself to be a high fee, poor performance model. Anyone that suggests a wealth manager is to your wealth, what a doctor is to your health, has not looked at the data. Or worse, is choosing to ignore it.

The finance industry wraps itself in complexity and jargon. People feel helpless and disconnected from their investments. They don’t switch, given the lack of alternatives. As a result, the bankers continue to enjoy our money, literally at our expense.

As Bob Jones the property tycoon said:

No one will take as much care with your money as you will yourself.

So what are you waiting for?


Shane Leonard, CFA

Managing Director

Stockflare

Please drop me a message @shaneleonard121 or the full team @stockflare.