The Race to Zero [#26]
When the exciting part of investing gets really, really cheap
The document was eight pages long. The fee for what’s in it is fifty thousand dollars a year.
You might even have one like this somewhere. A quarterly report in your inbox, perhaps still unread, plus the odd email or phone call recommending a trade – sell this fund, buy that one, the market’s shifting, etc. Plus an annual review. With coffee.
That’s the relationship. That’s what the 1% a year has been paying for.
I want to be careful here, because this isn’t a swipe at any adviser, it’s a description of a service operating on the assumption that information and execution are scarce commodities.
What 1% Actually Buys
Strip the report’s jargon away and look at the deliverable: someone picking which funds or shares to hold, and when to swap them. They call it ‘investment management’.
Whatever you call it, pop the bonnet to look under the hood and you’ll see the economics doesn’t work. You can actually buy exposure to the entire market – not just someone’s sweethearts –for something like one-tenth the price, through an index fund.
The gap between what ‘active’ costs and what ‘passive’ costs isn’t a mere rounding error. On a $5 million portfolio, it’s the difference between paying maybe $50,000 a year versus something less than $5,000.
Sure, if the extra expense translates to big wins, it’s a fee worth paying. But does it?
Even the Machines Can’t Do It
You’d think, with AI everywhere now, this is finally where the humans get their justification back — a machine smart enough to out-pick the market, worth every basis point it costs.
It hasn’t worked out that way. The AI-run funds that actually exist have mostly underperformed their benchmarks, not beaten them.
AI didn’t fail this test for lack of data, speed, or discipline. It doesn’t get tired, doesn’t hold a losing position out of pride, and can test decades of history in seconds. If reliable stock-picking were simply a matter of processing more information better, this is exactly the tool that should have proven it. It didn’t.
Which tells you something useful. If the technology built specifically to beat humans at picking stocks still can’t reliably do it, the case for paying a human 1% to do the same job was never really about skill in the first place.
Manufactured Complexity
When the outperformance doesn’t show up, the marketing tends to lean harder on sounding smart than on being smart. Regulators even have a term for it now — ‘AI-washing’ — funds claiming more artificial intelligence, or a cleverer kind, than they actually run, to sound cutting-edge and justify the fee. The US Securities and Exchange Commission has already started taking enforcement action against firms doing exactly this. It’s the same instinct, dressed differently, that shows up next.
None of this is actually new — it’s the second half of an experiment that’s already run once. Index and passive investing did this to the “market exposure” part of the industry twenty-odd years ago; fees for simply owning the broad market fell from around 2% to something less than 0.5% without anyone needing to get smarter. It’s cheaper and roughly as good.
Here’s what fee-defence looks like once skill stops being a credible excuse.
A newsletter landed in my inbox recently from a boutique fund pitching Bitcoin exposure with an additional promise of income between 15% and 25% a year.
“How,” one wonders, reading on. Brace yourself.
It’s a leveraged futures position layered with puts and calls on both sides and dynamic hedging doing something underneath which they called “theta scalping”. Several impenetrable sentences of jargon later and it starts to dawn on me what they’re talking about: a borrowed-money bet on Bitcoin, wrapped in an options structure built to spin off a bit of extra yield.
Interesting idea. Does it work?
The headline number reads like a track record — a precise, confident figure, stated flatly as something already earned. It isn’t until several paragraphs later before the truth surfaces: the figure came from a hypothetical backtest. Not one dollar of it had actually been earned by an actual client in an actual market. It was a spreadsheet, run backwards with 20-20 hindsight. It’s like turning a rainbow into a dot-to-dot, and hoping it draws another rainbow next time.
That’s manufactured complexity, not manufactured value. It’s built to be hard to price and hard to compare. Every corner of the industry about to be commoditised produces a wave of products exactly like this: not better, just harder to see through.
But This Is Good News for You
None of this is bad news for you.
If the exciting part of investing — the part that gets marketed, the part your fee has nominally been for — is on its way toward free, that’s not a loss. It’s a release. All the hours people spend agonising over fund selection, watching quarterly performance, second-guessing the last trade — that was never going to compound into anything durable. You were watching the wrong dial.
What doesn’t go to zero, what a machine can’t do for you and complexity can’t fake (not yet anyway), is the boring structural work: how the money’s taxed, in what order it’s drawn down, what legal structure it sits in, what happens to it when your circumstances change. That’s not a sales pitch for human advisers being special. It’s simply where the value has to land once the true cost of the commodity layer is revealed for all to see.
So What Is 1% For?
If fund management is heading to free — and by the evidence, it arguably should be closer to free already — the honest question isn’t “is my adviser good at picking stocks.” It’s “what have I actually been paying for, and who’s been minding the things that don’t show up in a quarterly report.”
The real question is: what’s going to move the needle, if investment management isn’t it?
Best regards
Daniel Brammall
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The WealthSpan Letter is general financial information, not personal financial advice. Consider whether any information is appropriate to your circumstances before acting on it.