professional investment advice (ii)

Yesterday, I wrote about the problems a Wall Street Journal reporter had in discovering how much she paid in fees to the professionals she hired to invest her money.  The task, which we’d think should be a piece of cake, turned out to be very difficult.  Although the reporter didn’t identify the firm in question, the corporate philosophy seems to be the usual one for active managers of emphasizing service rather than fees.  This decision, which is hard to fault in itself, has been transmuted into two courses of action–bury fee information as deeply as possible, and keep the fees (1.4% of assets per year, in this case) very high, in the hope no one notices.

Oddly enough, this strategy has been relatively effective for decades.

It seems to me, though, that being aware of what one is paying for professional investment advice is only part of the assessment process.  A second important criterion is what the gains in investment performance are that come from having an investment adviser.  The relevant metric is how effective the adviser’s asset allocation and portfolio management efforts are in keeping the client at least even with the appropriate benchmark after subtracting fees.  

Andrea Fuller’s case would work out like this:

Let’s say her “moderate” asset allocation ends up being 60% stocks, 40% bonds.  If we take the returns of the S&P 500 and of some broad bond index as proxies, a rough benchmark return for her over a given period is easy to calculate.

In my view, a reasonable expectation would be that one’s portfolio should (at least) keep pace with the index after fees.  I say “reasonable” although knowing less than a quarter of active managers are able to consistently exceed my standard and over half consistently fall short.

In an ideal world, an active manager who is consistently unable to perform in line with the appropriate benchmark after fees has an easy fix–at least a partial one.  Lower fees to the point where the portfolio is at least close to the index.  Her firm’s high fee level and the teeth pulling needed to figure out what they are suggest this is the last thing on its mind.

Given that this is the case, the operative question for Andrea, and for anyone else, is how much the service the firm may be providing–like determining asset allocation or the availability of a knowledgeable account executive to answer questions or handholding during crises–is worth in terms of losses to an index fund strategy that one could easily implement on one’s own.

It also seems to me that if annual returns consistently fall more than 1% below a benchmark after fees it’s worth the time to shop around for a different investment management firm.


3 responses

  1. Hi. I have separate question from this post. I notice you know Intel quite well. Can you please do some posts on how to analyse and invest in tech stocks? Eg what are the key indicators? How to time the cycle? Which parts of the value chain are uninvestable? I never really know how to look at tech sector. Thanks

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