Monthly Letter From CEO, Chris Jackson (July 2018)

In his 2014 book “The Zero Marginal Cost Society, “Jeremy Rifkin writes about technology’s leading roles in bringing about changes to lifestyles and society during the first half of the 21st century. One of the key themes for the 21st century will be a “zero marginal cost society” that will reduce the marginal cost of goods and services to near zero. In other words, we will soon enter into an age in which we can obtain many goods and services free of charge without going through markets.

A rather academic explanation may be helpful here. The marginal cost is defined as the cost a corporation needs to shoulder when it increases the goods or services it provides by one unit. For example, the marginal cost of renewable energy is near zero. Once solar panels are installed on a roof, they generate electric power at a close to a zero-marginal-cost. The same is true of wind power generation. Some well-known universities in the United States are offering massive open online courses (MOOC) free of charge and with unlimited participation and open access, enabling anybody in any part of the world to receive a university education. Since the marginal cost of such courses is zero, students do not have to pay tuition.

The interesting shift we are seeing in the retail investor landscape is the move to a ‘Zero Marginal Cost Investor’. The marginal cost to offer index funds or commission-free trading is now zero. The investor can now replicate an index and do not have a direct cost (There will be an in-direct cost, if you end up paying for broader services within the brokerage firm that is priced to recoup the lost-leader expenses). Fidelity Investments just beat all of the low-fee index fund competition to a move long expected: It will be the first fund company to offer core index funds (Fidelity Zero Total Market Index Fund and the Fidelity Zero International Index Fund) without any management fee and regardless of how much they invest in either fund. In addition, Vanguard announced its move to make all ETF trading free on its brokerage platform this month. Now there will be no restrictions, and no minimums required, to use the free-trading feature with any ETF. ETF experts expect Vanguard rivals to fire back with their own enhanced free-trading offers. All of the established players in the financial services sector also face pressure from venture capital-funded start-ups, such as Robinhood, which offers a free brokerage trading app and has been growing rapidly — in May Robinhood surpassed E-Trade in a number of users for the first time.

What does this mean for retail investors? First, they shouldn’t overact to the news and race to put all their money in this free index fund. Vanguard’s Total Return Index Fund cost 0.04%, and Schwab’s Total Return Index Fund cost 0.03%. The presumption that a difference of 1-3 basis points matter is more marketing than quantitative. The difference in expense ratios among Vanguard, Fidelity, and Schwab matter far less than which index is tracked and how well it is tracked. Being the market has been a more successful and reliable strategy that is trying to beat the market. Review your current fund holdings. What do they cost? How have they performed relative to its benchmark? Is it tax-efficient? Most importantly, are you paying too much to simply mirror the market or even underperform the market?

Audit your investments. Know what you own. It’s your money and your responsibility. Everyone doesn’t need a financial planner, but everyone needs a financial plan. If you don’t have the time, knowledge, technology and intellectual intrigue, then find a flat-fee fiduciary to help stop the potential hemorrhaging for your financial security.

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