In this edition of ‘Stock Teasers’ we are going to be looking at a submission to /r/CanadianInvestor on Reddit where the user is questioning why more people do not invest by themselves and are even scared to do so. Let’s dive in!

Below we can see the user’s submission where they highlight, in a somewhat harsh way, that many people are hesitant to do their own investing due to being intimidated by the task at hand. The user points out some of the drawbacks such as the high fees charged by financial/investment managers which reduces clients returns. The user ultimately asks how we get more people educated on investing to save themselves money in fees.

Source: Reddit

Our Thoughts

This question points out a very valid problem in the financial services world, that high fees can kill returns, but this is a two-edged sword in our opinion. First, looking at it through the lens of the user submitting this question, it is true that the structure of the industry benefits institutions disproportionately. There is not necessarily any way to ‘get around’ this problem as more people must want to educate themselves on investing. We do however believe that we are at an interesting point now where markets have recognized this issue and have started to adapt with new low fee products and services playing an increasing role. Products such as ETFs and low fee trading platforms like Questrade and Robinhood are gaining popularity due to the minimal fees that they charge and are aimed at servicing retail investors.

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The Contrarian View

The ‘devil’s advocate’ response to this question, and one that was frequently replied under the post is that people don’t have the time, curiosity, or knowledge to invest on their own, so they rely on investment managers and financial advisers. The example that was frequently replied to the post was that changing a tire is a relatively easy task but so many people still pay auto shops for this service because it is time consuming to do it on their own. Similarly, investing is a timely and risky task for those with no experience or background which is also fairly intimidating, so they give their money to professionals to deal with. These investment professionals require compensation for their services and hence the fees charged. Additionally, expense ratios are not all bad, as in the case of ETFs, retail traders are benefitted by being able to access a large basket of securities that would be much more costly (in fees) to access than what is being offered.

Conclusion

We are by no means advocating for the high fees and the typical 2 and 20 structure where funds charge a 2% expense ratio and 20% performance fee on profits. But, to an extent fees are necessary to compensate for trading related expenses as well as making these businesses profitable. Additionally, there is no problem utilizing an adviser or investment manager if one is uncomfortable with the concept of investing but wants to access higher returns. For individual DIY investors, the industry is evolving with a greater number of low-fee options becoming available, but the desire to learn must be there and all it takes is one small step forward to make progress!

Take Care,