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What the Financial Services Industry Can Learn from Costco

I enjoy nothing more on a weekend afternoon than going to my exclusive club and mingling with club members, snacking on assorted tasty morsels and knowing that my club is the best of its kind. My club? Well it’s Costco, of course. I am a big fan and loyal customer of Costco. In fact, a perfect Costco run is stocking up on necessities like eggs, coffee, an 82-inch LCD TV and capping off the trip with the famous $1.50 hot dog and soda deal[i].

A big part of Costco’s impressive merchandising and stock price performance (up 2,400% in 30 years[ii]) involves the retailer’s unrivaled ability to curate a selection of high-quality products at very low prices. This merchandising offering makes it simple for Costco shoppers to have confidence that they are selecting the best option at a great value. In essence, less selection equals more value and buyer confidence that they’ve made the best decision available to them.

“We have only one bullet in our gun, the right product at the right price.” James Sinegal, Costco Founder & CEO

Source: Company filings

Wholesale Financial Products?

What if Costco adopted this same merchandising philosophy with an offering of financial products such as mutual funds? I could envision a very narrow selection of highly suitable, ultra-low-cost funds. The offering could even be called the Kirkland Funds, named after the company’s highly successful private label product line.

While I don’t expect Costco to offer financial products anytime soon, I do believe that this type of highly curated, low-cost suitable fund offering would highlight what the financial services industry continues to get wrong. All too often, the financial services industry tells consumers that many more expensive options, even if similar, are better for investors and can produce desirable results.

Investors Fumble in the Jumble

Instead, human behavior and research shows that too many similar investment options at varying prices can actually lead to poor investment decisions.  In fact, Morningstar conducted a study to determine how investors choose from a lineup of multiple S&P 500 exchange-traded funds (ETFs) that are identical except for the fees (expense ratio) that they charge[iii].  The obvious choice for all participants in this study would be to choose the cheapest fund since all funds were similar in terms of holdings and performance.

However, this did not turn out to be the case. As shown in the table below, the study revealed that participants instead chose to allocate a significant amount of their money to the more expensive fund offerings (far right column):

 SOURCE: Morningstar, RightPond

 Why would these investors make this sub-optimal choice?  In this case, the study participants took a decision-making shortcut called Naïve Diversification.  

Given multiple choices, confusion and an attempt to not make a wrong choice, the participants thought they were avoiding the incorrect choice by haphazardly selecting multiple funds. Too many investment choices, whether in a 401(k), IRA, 529 plan or brokerage account, can actually distract investors from making a proper economic assessment of which fund is the best value for their money and future retirement savings.

Naive Diversification Can Be A Drag($)!

This same Morningstar study also showed that those investors that did not choose the lowest priced fund paid about four times more in expenses despite the fund choices all being the same!  This level of expense differential can also be a major drag on returns for investors over time, especially for retirement investments.

As the table below shows, an expense level that is three times more expensive (0.80% vs 0.20% for an expense ratio) than the same investment can significantly reduce wealth creation over time for investors.

Source: LCV Advisors

Take Action with the Distraction

The investment industry, including 401(k) providers to mutual fund companies, can do a much better job of helping investors by offering easy-to-understand and uncluttered fund line-ups that minimizes costs.

Advisors also have an important role in this by curating a personalized portfolio that guides clients toward optimal decisions and keeping more of their wealth creation over time.  There are also fund diagnostic tools available, including Morningstar’s Mutual Fund Screener that can help investors cut out the clutter and curate a simpler, lower-cost fund portfolio.


As it the case with Costco’s merchandising, a key principle to successful investing longer-term is that less can often lead to more. If Costco one day expands its wholesale offerings to mutual funds, that will be a bright day. There is a lot that can be learned from Costco’s merchandising model and applied to the financial products we rely on to build and preserve wealth.



[i] The price of Costco’s hot dog and soda package has remained at $1.50 for over 30 years. Costco CEO and founder once said decades ago, "If you raise the price of the effing hot dog, I will kill you." Needless to say, the price of Costco’s hot dog and soda package has remained at $1.50 since 1985.

[ii] Costco stock price: 8/22/88: $9.13. 8/22/18: $229.21

[iii] https://www.morningstar.com/blog/2018/06/05/naively-diversify.html