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BUFFETT: Wall Street's promise for superior returns have cost 'elites' $100 billion

Iconic investor Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK-A, BRK-B), calculates that the wealthiest investors have lost billions in search for superior returns in the market.

“The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel should buy them something superior compared to what the masses receive,” Buffett wrote in his newest shareholder letter.

Cash burn (Source: IMDB/Warner Bros)

“In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial ‘elites’ — wealthy individuals, pension funds, college endowments and the like — have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars,” he added.

Unfortunately, paying up for “superior” investment advice rarely comes with superior returns.

He continued: “This reluctance of the rich normally prevails even though the product at issue is—on an expectancy basis—clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade. Figure it out: Even a 1% fee on a few trillion dollars adds up. Of course, not every investor who put money in hedge funds ten years ago lagged S&P returns. But I believe my calculation of the aggregate shortfall is conservative.”

Reuters/ Lucas Jackson

The 86-year-old multi-billionaire has been a critic of the hedge fund industry and its exorbitant fees. Hedge funds are known to charge investors fees known as “2-and-20”, meaning 2% of assets and 20% of profits. Those fees can vary with some being lower and others being as high as 3% and 30%.

Nine years ago, Buffett made a famous bet with a fund-of-funds manager that active investment managers, in aggregate, could not outperform a low-cost index fund over a period of time.

Buffett is currently smoking the hedge fund industry in that wager.

He recommends that both large and small investors put their money in low-cost index funds, like those offered by Jack Bogle’s Vanguard.

Yahoo Finance will host the exclusive live stream of Berkshire Hathaway’s shareholders meeting on May 6, 2017.


Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.

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