Why Eat (Pay) More Donuts (Money) for the Same Gym Membership (Investment)?

Consider an alternate universe. In this universe, gym memberships do not cost money. Instead, in exchange for patronizing a gym’s services, gym management insists that you eat several donuts each year. Weird, right? (While it is weird, it works well for explaining the pricing of investments products.)

If I exercise regularly – and the gym does not require that I eat too many donuts – I could probably lose weight for all my effort. However, if a particular gym requires eating lots and lots of donuts, I could likely end up fatter – or at least worse off than had I patronized a gym with a low donut eating requirement (ER). 

Now, consider two gyms that are literally identical: they have the same exercise machines, offer the same classes, are open for business during the exact same hours, are in the exact same location, and are even staffed by the exact same people – or maybe each person’s twin brother or sister. There is absolutely no difference between these two gyms – except the donut eating requirement (ER) of each gym.

The first gym, the Vanguard Group gym, requires that I eat five (5) donuts a year. In the end, the eating requirement (ER) of just five donuts a year would be negligible next to the benefits of regular exercise. Despite eating those five donuts each year, I would get in shape. In fact, I would be in better shape eating five donuts a year and exercising every day, than if I just sat at home and did nothing - eating zero donuts and not working out. Regular exercise would more than completely cancel out the small donut eating requirement (ER) of the Vanguard Group gym - leaving me fit and trim.

The other identical gym, the Haufenbrau Investments gym, requires that I eat 150 donuts a year. (While there is not a mutual fund company called Haufenbrau, there is a mutual fund company that will charge you 150 basis points annually for an S&P 500 index fund.) That is a substantially higher annual eating requirement (ER) than the Vanguard Group gym - especially considering that the gyms are identical. However, even if I do choose the Haufenbrau Investments gym, eating 150 donuts a year could probably be nullified by regular exercise. Naturally, I would end up in better shape over at the Vanguard Group gym - given Vanguard Group's low annual donut eating requirement. But in the end, the Haufenbrau Investments gym would also help me drop some pounds.

However, the Haufenbrau Investments gym also imposes an additional donut cost over its existing annual eating requirement (ER). Every time I work out, I am required to eat an additional 4.75% of my bodyweight in donuts! So, any effort to work more frequently - to cancel out the 150 donuts (ER) I have to eat annually - is itself nullified out when I am loaded up on donuts (4.75% load) each time I workout.

While it was entirely possible that I could get relatively fit by exercising regularly and having to eat just five donuts annually – I am unsure if I would even get in shape given the vast amount of donut consumption required by the Haufenbrau Investments gym. In fact, I am concerned that all my donut eating at the Haufenbrau Investments gym would cancel out my fitness goals – leaving me exactly where I started - or maybe even fatter!

Naturally, the Vanguard Group gym is the best solution. Since the gym is absolutely identical to the Haufenbrau Investments gym, the smaller donut eating requirement brings me much closer to realizing my fitness (investment) goals.

Now, to Haufenbrau Investments's credit – at least they are getting people to exercise. However, next to Vanguard, Haufenbrau's high annual donut eating requirement (ER) and the 4.75% donut load will not net much weight loss (investment gain).

That being said – why would anyone ever consider paying more (having to eat more donuts) for the exact same product? The simple answer is that without shopping around, a gym goer (read: investor) may not know that the Vanguard Group gym even exists. Further, an investor may not know about the mutual company structure of the Vanguard Group - a company structure that skirts normal business conflicts of interest.

Another reason for the success of companies like Haufenbrau Investments may be due to aggressive marketing efforts. Consider you’re solicited for a gym membership (mutual fund investment). You know that you should be exercising (saving for retirement), so the donut eating requirement (fee) sounds reasonable - in part because you have no idea what the other gyms are charging. Also, those gym contracts and accompanying fees are sometimes made purposefully confusing.

Most people are not dieticians (investment advisors), so the high donut eating requirements (fee) may come across as particularly extreme (expensive). However, with a little knowledge, the exercise junkee knows that the exact same product can be had for less. This way, you're saving for retirement and not eating so many donuts so as to cancel out your investment gains.