The need for transparency

Transparency is one of the most essential aspects of investing and yet very few investors know the need for transparency and demand written evidence of the key components required for a successful investment experience. What are the essential issues that need clear transparency?

Risk

Risk is always the most important issue to clearly understand. Readers should understand that risk falls into two factors. The first and most important is the risk of losing one’s capital permanently and the second is the level of expected volatility. (Volatility or pricing fluctuations affect all investment options in the short term.)

Returns

Naturally investors need to have “predictable” returns from investments. Science now offers 100 years of reliable data showing the returns of all well known asset classes. It also has compelling research proving that buying any individual security is speculation and not investing prudently.

Costs

High costs devastate returns, hence is critical investors demand to know the total costs to which they are committed. This is one of the most difficult areas from which to gain transparency, since the majority of investment service providers don’t even know the true costs themselves. The following is a check list of the cost areas that need to be exposed:

Normally transparent costs:

• Management expense ratio (MER)
• Advisor fees
• Administration fees
• Brokerage

Non transparent costs

• Agency costs (brokerage, stamp duty, custodial)
• Marketing costs
• Spreads
• Exchange fees
• Trustee fee
• Under-performance cost
• Taxation

Investors must understand that these trading costs can exceed management fees. Another reality is that the market impact costs for small cap stocks can easily exceed 10%.

Property

This is an extremely expensive asset class since investors have to contend with expensive purchase costs, ongoing maintenance, rates and insurance, and then substantial sale costs including real estate commissions and legal costs.

Study results: As I have stated before it is well documented that the majority of investors are not only taking on very high risks even when they think this is not the situation, but also, they are only receiving 50% of their entitled returns. (Asset class market return).