Charles Ellis says 1% advisory fee can take 15% of returns
Investing veteran Charles Ellis told MarketWatch that fees and short-term bets are still tripping up many ordinary investors.
By Frankie Delgado · News Reporter
3 min read
Charles Ellis says an advisory fee that looks small on a statement can quietly take a far bigger bite out of an investor’s gains, according to a MarketWatch interview with contributor Michael Sincere.
Ellis, the longtime investment consultant and author of “Winning the Loser’s Game”, told MarketWatch that a 1% charge on assets can amount to about 15% of returns if the investor earns a normal 7% return. His point: the fee should be judged against what the investor keeps, not against the account balance.
The warning lands squarely in Ellis’s decades-long argument that most investors are better off using low-cost index funds than trying to find a star stock picker. MarketWatch noted that Ellis founded Greenwich Associates, advised major financial institutions, served on Vanguard’s board with John Bogle, chaired Yale University’s investment committee and taught at Harvard Business School and Yale.
What did Charles Ellis say about advisory fees?
Ellis told MarketWatch that index funds can cost 5 to 10 basis points, while an active manager may charge 1% of assets. A basis point is one-hundredth of a percentage point, so 5 to 10 basis points equals 0.05% to 0.10%.
He argued that the active fee looks far less modest when measured as a share of expected gains. He also told MarketWatch that active managers, on average, produce negative additional returns after fees, making the cost of hiring them especially hard to justify.
An active manager tries to beat a market benchmark by choosing investments. An index fund generally tracks a benchmark instead, aiming to match the market at lower cost.
Why does Ellis favor index funds?
Ellis told MarketWatch that the stock market is packed with highly skilled professionals competing against one another. In his view, those advantages tend to cancel out, while the fees remain.
He said data over a 20-year period show roughly 85% of actively managed mutual funds fail to beat the market. Ellis also told MarketWatch there is no dependable way to know in advance which managers will be in the winning 15%, aside from the clue of lower fees.
His view of stock picking is blunt: managers who outperform usually do so by small margins, while those who miss can miss by much more. He attributed part of that risk to managers taking larger chances when they are behind and trying to catch up.
What does Ellis tell young investors?
Ellis told MarketWatch that time is the investor’s strongest advantage. He said six months does not count as long term, and that a real long-term horizon can stretch 40, 50 or even 60 years.
For investors with at least 10 years ahead, Ellis said decisions should be driven by time rather than a belief in special talent. He told MarketWatch that a long horizon calls for being close to fully invested in stocks, while shorter-term money belongs more in bonds or money-market instruments.
He also cautioned investors against trying to jump in and out of the market. Ellis said short-term market moves are full of surprises, while the longer-term pattern becomes easier to live with.
Ellis’s latest book, “Great American Investments”, looks at 14 major U.S. government investments, including the Louisiana Purchase, the GI Bill and the creation of NASA, according to MarketWatch.
This story draws on original reporting from MarketWatch.