Avoidable dilution consists, for the most part, of costs incurred by investors when they try to obtain results better than the market’s or the corresponding passive vehicle’s. While this is possible, it is a rare phenomenon and in general the costs associated with it are not worth it.
- Active management costs: Total expenses associated with the vehicle(s) selected by the investor, with the objective of obtaining a superior return. Important embedded (and unreported) transaction costs are associated with the turnover underlying the chosen vehicle/strategy, with the size of the vehicle itself, and with the type of market it operates in.
- Advisory fees: Costs associated with the hiring of one or multiple investment advisors to help in the management of the client’s wealth. Often understood to have the same role as active managers (see previous point), the advisors’ role is actually much boarder and “disciplinary” in nature: they are the ones who should keep every aspect of the investment strategy in line over time.