Groupthink is a psychological phenomenon in which people strive for consensus within a group. In many cases, people will set aside their own personal beliefs or adopt the opinion of the rest of the group. The term was first used in 1972 by social psychologist Irving L. Janis.
As an example, the Challenger Space Shuttle disaster. Engineers of the space shuttle knew about some faulty parts months before takeoff, but they did not want negative press so they pushed ahead with the launch anyway.
Do your wealth managers understand compounding costs but choose to ignore them? Are they suffering from GroupThink?
There is no doubt that you should expect your wealth manager to understand compounding. Actually, they do, but just like the Space Shuttle disaster, do they want to make you fully aware of it!. Probably not.
If we take a trip back in time when annual investment returns for mixed portfolios were in excess of 10% per annum. If investment costs in total, cover advice, and money management represented say 2% each year, then 20% of the return was taken in costs. You end up with 8%. Today expected returns for a mixed portfolio can represent 5% each year or less. However, the costs remain the same. That means costs represent 40% of the return. So for the same work by fund managers, all investors end up with less of the investment cake.
Wherever you obtain your information, the consensus for mixed portfolio returns moving forward is a single digit. Therefore, the impact of costs is massive. Yet it appears many wealth managers, stockbrokers, and investment advisers still seem to focus on the returns rather than the costs. Groupthink is to ignore costs and instead focus on returns. One is real and the other is hopeful.
If Groupthink is not challenged, investors accept what information they are given. In truth, if investors do not question the people they delegate their money to, the only people who pay the price will be you.
More information on compounding costs; its called The Tyranny of Compounding Costs