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.


how much does professional investment advice cost?

the article

Yesterday’s Wall Street Journal has a curious article in its monthly “Investing in Funds & EFTs” section.  It’s by Stanford graduate Andrea Fuller, a reporter whose specialty is data analysis.  It’s about her trying to find out how much she pays for professional investment advice/management.

the outcome

As she describes it, her situation is a simple one.  She uses an investment firm that’s “one of the largest in the country,” no name though.  The bottom line for her is that she pays a yearly fee, deducted daily, of 1.40% of the assets under management, which consist entirely of ETFs and mutual funds.

The fees break out in the customary way into two parts–an overall fee, sometimes called a “wrap” fee for the service of determining an appropriate asset allocation and selecting funds/ETFs,  plus providing an interface to discuss investment issues.  In Ms. Fuller’s case, that amounts to 0.85% of the assets.  In addition, she pays an average of 0.55% per year for the portfolio construction and management of the mutual funds and ETFs she owns.

pulling teeth

What’s interesting about the story is that Ms. Fuller (1) didn’t know this information before she decided to write the story, and (2) assumed, as I would have, that the figure would be easily available with a phone call or email.  In Ms. Fuller’s case, that’s wrong.

(a longish, maybe pedantic…sorry) Note:  the article implies that all the products are “in-house,” that is, provided by a single investment firm which is also the client interface.  If so, finding out costs is straightforward–what Ms. Fuller pays in total and what she pays to the firm are the same.  If, however, the investment firm uses a third-party portfolio manager for any portfolio products, it typically demands a portion of the third party’s management fee in return for providing access to “its” client.  This means that the total fees paid consist of two parts:  the fees paid to the client-facing investment firm and amounts paid to third parties.  In my experience, investment firms are very reluctant to disclose what their fee-sharing arrangements are.  A Customer Service hotline or a plain-vanilla investment adviser would never have that information.  In that case, the answer to the fee question Ms. Fuller posed is not so simple.)

Tenaciously, Ms. Fuller made a series of phone call (and email?) attempts to get this basic information from her investment adviser.  On at least two occasions, she answer she got was wrong–and, surprise, surprise, understated fees.  Although she finally verbally received the figures I cited above, she was unable to get anything in writing.  Apparently, this basic data isn’t disclosed on the firm’s website, either.  At one point during her journey, she was told to consult Morningstar and figure the fees out herself.

My thoughts:


–By and large, investment firms are run by professional marketers, not professional investors.  Their emphasis is typically on cultivating a relationship that focuses on client service and peace of mind and which deemphasizes the nuts and bolts of fees and performance vs. an index or competitors’ offerings.

Still, I’ve never encountered a situation where fees haven’t been readily available and disclosed somewhere in the small print.  To me, Ms. Fuller’s firm seems to me to be either stunningly inept or to be deliberately choosing to make fee information virtually impossible to obtain.


More tomorrow.