The Bundled Financial Product Problem and How to Solve It
Let me tell you something most financial advisors would rather you not think about. When you invest your hard-earned money into what the industry calls bundled financial products, you are paying for layers of costs that are about as transparent as mud in a Mississippi river bottom. Some of these costs are disclosed, sure. But many of them are buried so deep in fine print that you would need a magnifying glass and a law degree to find them.
Now, bundled financial products are exactly what the name suggests. They take multiple investment components and wrap them together into one neat package. Mutual funds are the most common example. You buy one share and suddenly you own a piece of hundreds or even thousands of different stocks or bonds. Sounds convenient, and it is. But convenience has a price, and that price has been growing since this whole industry got started over a century ago.
The story begins in Boston back in 1924, when three businessmen established the Massachusetts Investors Trust. This was the first open-end mutual fund in America, and the company still exists today as MFS Investment Management. What started with fifty thousand dollars has grown into trillions across the industry. The idea was brilliant for its time. Regular folks could pool their money together, hire professional managers, and own a diversified portfolio without needing a fortune to do it. That innovation opened the door to investing for millions of everyday Americans.
Then came the Great Depression and all the regulatory reforms that followed. By 1940, Congress passed both the Investment Company Act and the Investment Advisers Act to bring some order to the chaos. The folks at Massachusetts Investors Trust actually helped draft that legislation, and the requirements written into law mirrored what they were already doing. The intention was solid. Protect investors. Require disclosure. Make sure the people managing your money have a legal obligation to look out for your interests.
But here is where things get interesting. The world has changed considerably since 1940, and not all of the changes have been in the investor's favor. The bundled product industry has become extraordinarily creative at layering fees on top of fees while technically staying within the disclosure rules. You see the expense ratio published right there in the prospectus. What you do not see quite so easily are all the other costs eating away at your returns.
Let us start with transaction costs. Every time a mutual fund manager buys or sells securities inside that fund, there are brokerage commissions involved. Research from UC Davis found that these transaction costs can actually exceed the stated expense ratio for some funds. Small cap growth funds averaged over three percent annually in transaction costs alone. That is money coming right out of your pocket, and it does not show up in that nice clean expense ratio number.
Then you have the bid-ask spread problem. When buying and selling bonds especially, there is a gap between what buyers will pay and what sellers will accept. That spread is essentially a hidden toll you pay every time securities change hands. For illiquid investments or bonds that do not trade frequently, these spreads can be substantial.
And speaking of transparency problems, let us talk about non-traded real estate investment trusts for a moment. The SEC itself issued a warning back in 2015 about these products, citing high fees, lack of liquidity, and poor transparency. Upfront fees can run anywhere from nine to fifteen percent of your investment. That means for every dollar you invest, only eighty-five to ninety-one cents actually goes to work for you. The rest goes to brokers and promoters before you earn a single penny in returns. Non-traded REITs often do not provide share valuations for eighteen months or more after your investment. You literally cannot determine what your investment is worth for extended periods. Meanwhile, distributions that look attractive might actually be coming from the money you invested rather than from actual earnings.
Private placements present similar challenges. These investments are frequently misunderstood, and the people selling them do not always make the risks crystal clear. When you cannot easily see what you are paying or understand what you own, that is not sophistication. That is confusion dressed up in a nice suit.
The alternative to all this complexity is unbundling. When you strip away the layers, avoid unnecessary platform fees, eliminate middlemen where they are not adding value, and invest directly where possible, the savings can be substantial. We are talking about potentially hundreds of thousands of dollars over a retirement that could span thirty years or more.
So when you are ready to understand exactly how this should be done, when you want someone to show you where your money is actually going and help you keep more of what you have earned, that is when you call us.
Truesdell Wealth. 352-612-1000.