From Charlie Munger’s Herb Kay Memorial Lecture, “Academic Economics: Strengths and Weaknesses, after Considering Interdisciplinary Needs” (University of California at Santa Barbara, 2003):
…I asked the question “Is there a functional equivalent of embezzlement?” I came up with a lot of wonderful affirmative answers. Some were in investment management. After all, I’m near investment management. I considered the billions of dollars totally wasted in the course of investing common stock portfolios for American owners. As long as the market keeps going up, the guy who’s wasting all this money doesn’t feel it, because he’s looking at these steadily rising values. And to the guy who is getting the money for investment advice, the money looks like well-earned income, when he’s really selling detriment for money, surely the functional equivalent of undisclosed embezzlement. You can see why I don’t get invited to many lectures.
Fee-drag is insidious and nearly invisible to the human mind at a glance. As COVID-19 demonstrated, we are not wired to intuitively understand compound growth. When you see your accounts growing, you are happy. Even if you see your fees, they may seem reasonable on a snapshot basis.
What you don’t see, of course, is the effect of those fees year after year. Every loss is another piece that can’t undergo the magic of compounding in your favor. As the saying goes, “it’s time in the market, not timing the market.”
If you ever wonder how nice people can practice in an Assets Under Management model, the same problem works in both directions. Your money is still going up, so they feel they are providing a valuable service, especially in holding you to a plan and preventing you from otherwise hamstringing yourself (like, say, risking your nest egg on chasing meme stocks on Reddit or buying start-up cryptocurrencies).
Psychologically, we’re very good at cognitive dissonance: of not seeing what is inconvenient for us. Those professionals would rather see the “value” they create in terms of investment growth and the end-result financial security and not the excessive value removed from larger investors (and the even larger wealth those clients might otherwise enjoy).