Investor Solutions uses institutional class index funds including DFA Funds to precisely target the world's most attractive markets at the lowest possible costs. The total cost of executing our strategy is remarkably low, in many cases less than the cost of true no-load mutual funds. But, cost is only one of the benefits of a relationship with Investor Solutions.
The difference between institutional versus retail funds boil down to cost and style.
Advertising and other promotional expenses are extraordinarily expensive. If you don't think so, just call the Wall Street Journal or Business Week and ask for the quarter page ad rate. Better yet, buy a thirty second ad on the Super Bowl. Retail investors respond to advertising, but institutions regard advertising by an investment manager as a cost they neither want nor need, and refuse to pay for it. Strangely, most retail investors are content to pay additional expenses for advertising that benefits the fund family at the expense of the investor. By contrast, few institutions respond to advertising, preferring to hire outside professional advisors or consultants to assist with manager searches.
Administrative costs are another big issue. Institutional funds cannot afford the overhead that comes with retail sales. It takes lots of computers, phone lines, mailing costs, representatives, printing, advertising, etc. to run a retail fund. It costs money to do a $50 dollar switch for a nervous retail investor. It costs money to provide a $500 account with an annual prospectus and quarterly reports. Those services are priced into the fund's expense ratio.
Institutional funds must keep their costs down if they are going after giant accounts. No institution would pay for services that they do not use. Many institutional funds allow selected investment advisors to participate in their funds through discount brokerage houses.
But the benefits are far more important than just the substantial cost differential.
Many retail funds lack investment focus. Their charter allows them to invest in any securities anywhere anytime. A growth fund might decide to buy a few large company stocks, a few emerging market stocks, a few convertible bonds, a few micro cap stocks, and a few Japanese banks. The implied pitch is "give us your money, we will do something smart with it." This type of approach prevents any investor from properly evaluating the contribution of the fund's managers to the portfolio. Analysis of the fund's performance becomes impossible because no benchmark is possible.
Few institutions would put up with lack of focus or style drift. Investment managers or mutual funds are expected to play roles as building blocks in the total portfolio. It is understood that asset allocation decisions will be made by the investor's investment policy. As a result, managers that stray from their mandated style, area of expertise, or discipline are often terminated. This often happens even if the results appear temporarily better than benchmark.
Institutional funds offer an investment focus and protection against style drift not generally found in retail funds.
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