All right, let's talk.

Two recent columns about the true cost of money management brought a wave of reader mail filled with questions, objections, and defenses. The majority of the messages were from people on the sell side who felt I was being unfair and had something against people in the financial services industry.

I don't. I simply made calculations based on research that has been accepted and repeatedly confirmed for 30 years. In the first column (Tuesday, November 27, 2001: The Real Cost of Long Term Money Management) I showed the impact of fees ranging from zero to 2 percent a year on accumulations in 401k plans. In the second (Tuesday, December 18, 2001, The Lifetime Cost of Money Management), the exercise was continued through retirement.

In both cases, small increases in the cost of management had an enormous impact on what's left for the investor. Because costs are compounded over long periods, a difference of 1.00 percentage point a year can reduce the amount accumulated by about 30 percent. A very high cost can reduce your return more than the highest income tax rate.

That said, let me address some of the issues raised.

Why Don't You Write About New Ways To Make Money? If management costs can reduce your return by 30 to 70 percent, new ways to make money don't mean very much. You'll still suffer the losses from excessive costs. The most productive step any investor can take to improve his long-term returns is to reduce the cost of investing.

Zero Cost Isn't Realistic. That's right--- it's unreasonable to think that money can be managed for nothing. But we have to start somewhere. Zero, an unachievable ideal, was chosen as an absolute. No one ever gets to the bottom of a temperature scale, either.

As a practical matter, there are high-cost investment media, moderate-cost investment media, and low-cost investment media. There is no evidence that paying high costs leads to higher returns or greater safety.

It is not certain that higher costs lead to higher service, although that is often claimed. It is certain that the high-cost investment media are trying to maintain or raise their "take" from our investments with wrap accounts and new investment packaging.

The low-cost investment media, on the other hand, are lowering their costs. They are getting pretty close to zero. Vanguard, conceived as the low cost provider in the industry, offers its major index fund (Vanguard Index 500) at a cost of 0.18 percent a year. If you have a lot of money, you can get Admiral shares in the same fund with an annual expense of only 0.12 percent a year. As I said, pretty close to zero.

Finally, Barclays Global offers investment units in some 401(k) plans for as little as 0.01 percentage points a year. That's very close to zero.

Advisors Aren't Bad People. I never said they were. If you compared two brilliant advisors who were loved and respected by everyone in their lives, the one who charged more for his services would deliver a lower return to investors in the long run. That's the way it is. This is the single fact the Wall Street/Retirement Complex doesn't want us to think about.

Advisors Can Do Better Than Individuals. That's not the issue. Some advisors can do better than some individuals but not all advisors can do better than all individuals. Whether we manage our money for ourselves or have others manage it for us, there are costs. We need to pay attention to costs.

Advisors Are More Disciplined Than Individuals. This only works if you assume that all advisors are disciplined investors and all individuals are irrational twits. In reality it's a mixed bag. A small number of investors will have the good fortune to meet qualified and disciplined advisors who can keep them from making mistakes while charging reasonable fees. A larger number will meet advisors who will do better than the unaided investor--- but the benefit will be smaller than the fees. Others will meet a salesman with limited experience and a simple goal--- to make as much money as possible off your money. All of them will be called advisors or consultants. It's not a pretty picture.

One recent reader communication cited an offer to advise him for a staggering 3 percent a year. Fees that size are a good proxy for irrational twits--- the only difference is that they will reduce the long-term returns with slow efficiency rather than fast paced trauma.

That's the way it is.

To read the original columns, visit these URLs: (online soon) (online soon)