Complexity to justify fees 

By Bob Peters || May 30, 2025

Sources of Knowledge

There are many areas of life where your own experience isn’t enough to solve a problem. In those cases, a subject matter expert can help. Today, YouTube videos assist in diagnosing and solving a range of issues. Soon, AI agents will likely provide knowledge across nearly all aspects of our lives. 

Unnecessary complexity makes it hard to leave an advisor

This evolution brings disruption and risk, but also great potential for medical and scientific discovery. One area where improvement is overdue is wealth management. Too often, complexity is used to justify high fees. If that complexity consistently produced better long-term, risk-adjusted returns after fees, it might be justified—but it doesn’t. So, let’s contrast that with the simplicity and low cost of passive index investing. 

What is an Index? 

An index tracks the performance of a group of securities. You can create one with just a few assets. However, the most common ones are broader, such as the S&P 500 and the Total US Stock Market Index. 

The S&P 500 includes the largest publicly traded US businesses, selected by Standard & Poor’s. In contrast, the Total US Stock Market Index includes most US-traded companies. While you can’t invest directly in an index, they serve as benchmarks for Exchange-Traded Funds (ETFs) and Mutual Funds (MFs). Although thousands exist, you only need a few highly diversified indices to use as benchmarks. 

What is a benchmark and why do I care? 

Benchmarks let investors compare their ETF or MF performance. For example, the S&P 500 is a benchmark for large-cap US stock funds. The Russell 2000 is commonly used for small-cap US stock investments. International funds often use the MSCI ACWI as their benchmark. 

You care about benchmarks because they give you consistent metrics to build a long term investment portfolio. 

The importance of choosing the right benchmark when you choose your ETF or MF 

Using the right benchmark matters. If you’re making an apple pie, you’d compare apples—not oranges. Similarly, don’t compare a broad US stock fund against a small-cap index. That’s mixing apples and oranges. 

Can I buy an Index? 

No, but you can buy a fund that closely mirrors it. These are known as passive funds. Their managers buy and sell securities to match the index as closely as possible. 

For instance, you can’t buy the S&P 500 Index itself. However, you can buy VOO, a Vanguard ETF that tracks it. VOO’s expense ratio is just 0.03% per year, meaning it may slightly underperform the index due to minimal management costs. 

Another example is Vanguard’s VTI. This ETF tracks the Total US Stock Market Index and also costs 0.03% annually. 

Are all Index Funds equal? 

Not quite. Most ETFs and MFs that track indices are market-cap weighted. This means they hold larger companies in greater proportion. Some funds are “equal-weighted,” where each company has the same dollar allocation. 

As of April 30, 2025, VOO’s top three holdings were Apple (6.75%), Microsoft (6.22%), and NVIDIA (5.64%). These weights reflect the companies’ relative market caps. 

Concerned about concentration risk? Invesco offers RSP, an equal-weighted ETF. As of May 23, 2025, its largest holding was just 0.30% of the portfolio. It includes similar companies but gives more weight to smaller ones. 

The reason I wrote this blog

A recent conversation with a long-time friend inspired this post. Due to his declining health, he and his wife hired a financial advisor. A wise move, given the circumstances. The advisor’s firm is reputable, and they shared a PDF outlining the investment services. 

After reviewing it, I noticed a few issues worth highlighting. 

Lack of Benchmarks

Earlier, we discussed how indices benchmark ETFs and MFs. With a benchmark and ticker, you can assess performance net of fees. 

The proposed investments used proprietary funds with no benchmarks. This omission makes it impossible to evaluate underperformance or outperformance. Transparency was also lacking—no clear details on costs or transaction fees. 

Diversification is good…

Diversifying reduces risk and can improve returns. Nobel Laureates like Harry Markowitz and William Sharpe proved this through Modern Portfolio Theory. 

But is it possible to overcomplicate diversification? 

Yes. A few low-cost ETFs or MFs, in my opinion, can give you ample diversification. Rebalancing once or twice a year is usually sufficient. This approach is simple and requires little ongoing effort. 

…But It Can Be Abused 

My friend’s advisor allocated assets across 31 different ETFs, MFs, and individual stock baskets. Nearly 23% were in individual stocks within “Separately Managed Funds.” Additionally, 22 of the 31 funds held less than 2% of the portfolio each. 

In my view, this added unnecessary complexity. 

You could achieve global equity exposure with one ETF: Vanguard’s VT, which holds around 10,000 stocks. The cost? Just 0.06% per year. Don’t want international exposure? Use VTI, which covers nearly all US stocks, for 0.03%. 

Both involve minimal trading, which keeps friction costs low—unlike actively managed portfolios. 

Simplifying Bonds 

If you want diversification beyond stocks, you can buy individual bonds or bond funds. Some investors may benefit from selecting bonds themselves. But does the added cost of a bond advisor outweigh the return? Maybe.

For those seeking simplicity, there are easy options. For example, Vanguard’s BIV (as of April 30, 2025) held 2,301 US government and corporate bonds with durations of 5–10 years. Cost? Just 0.03% annually. 

BND, another Vanguard ETF, held 11,344 bonds with similar durations and the same low cost. 

I’m not saying you should buy VTI, VT, BIV, or BND. I’m saying that low-cost, diversified, and simple solutions exist. 

Fees and Hidden Costs Matter 

Fees and hidden trading costs matter—a lot. Over the past 20 years, low-cost ETFs and MFs have become great tools for investors. 

Paying a fee-only advisor for help with planning and allocation may be worth it. Still, excellent low-cost financial planning tools are now available to the public. I pay $120/yr to use Boldin.  It took about 3 hours to input the information.  Unless there is a life event, I only need to review it a couple of times per year. Asset allocation, tax management, and risk monitoring are all important—just make sure advisor fees match the value provided. 

How Much of the Pie Goes to Advice? 

In a prior blog, we shared asset class returns and expected future returns. As of 3/31/2025 Research Affiliates projected inflation-adjusted returns from –1.6% to 6.5% over the next 10 years. 

So ask yourself: how much of that return are you willing to spend on advice? 

According to Morningstar, the average actively managed US equity ETF fee in 2024 was 0.60%. Add a 1% advisory fee, and you’re subtracting 1.6% from that return range. Ouch. 

In Conclusion 

You can get diversified exposure to stocks and bonds for as little as 0.03–0.07% annually. If you need help managing emotions or making financial plans, fee-only advisors can assist. But ask yourself: how much is that help worth? 

One final point: behavior matters. 

The best results come from having a plan, investing regularly, using compounding, owning a few diversified funds, rebalancing slowly, and staying calm. Diversification means some holdings will underperform at times—don’t let that derail your strategy. Stick with your plan. In the long run, this steady approach beats chasing returns or stock picking.