Two reasons to measure performance
There are two general reasons why it’s essential for any investor to periodically and methodically measure investment performance:
–to protect and build your financial assets, and
–to develop your skills in making investment judgments.
These reasons hold whether you decide to manage your money directly or elect to hire a financial planner of some type to help you with the process.
Using a financial planner
Let’s start with the financial planner case. A typical arrangement will entail your agreeing to pay the planner a percentage of the assets under management in return for his/her advice.
This type of arrangement is sometimes called a “wrap fee” account. The percentage can vary, but in my experience it usually ranges from 1.5%-2.0% of assets.
Until relatively recently, when government scrutiny of these arrangements forced changes, even assets held in money market funds were subject to the full fee. Today, it’s common to have a lower fee apply to cash or bond assets. (The planner will typically receive other compensation that is rarely, if ever, mentioned. For example, the planner will receive a “12b1” fee of .2%-.3% of assets per year from the mutual fund companies whose offerings the planner’s clients hold. A fund company may also pay food, transportation and lodging expenses for the planner to attend educational seminars held at posh resorts. This can happen if the planner is a very successful asset gatherer or if he reaches a threshold level of client ownership of the fund company’s products.)
What a hypothetical investor pays a planner
Taking our hypothetical investor with $1 million in equity assets, the yearly fees paid to a financial advisor will be on the order of $25,000. That’s a new car, a wedding, college tuition at any state university, several lavish vacations–or the carrying costs of a vacation home. I could go on, but you get my point. This is serious money.
You owe it to yourself to find out what, if anything, you’re getting for this outlay. Continue reading →