Paying a professional to handle investments

[FrugalFred]

What’s the consensus on having a professional handle your investments? I like the passive nature of this strategy and not having to worry about losing it all.

My only concern: would the 3% rule still appply, or would I have to use a 2% swr instead to account for fees?

If it’s 2%, I figure I can always find some easy online gigs that bring in $3K/year to make up the difference.

[jacob]

A professional (I presume you're talking about an advisor for your portfolio; not just a managed fund) is no guarantee of losing the investments. It's more of a guarantee against doing something stupid just because you read about it on the internet; or other kinds of stupid, such as panic-selling.

You should add your fees to your regular spending along with groceries, electricity, taxes, ...

If you pay a percentage of your portfolio value, you can just subtract the fee% from the SWR%. It gives the same result as above.

[Gilberto de Piento]

If you can find a good one it might be OK. Some friends brought money to an adviser and ended up invested in stock funds that underperformed total market-type index funds. Not only were the funds not very good, the funds had very large fees (somewhere between 1 and 2% if I remember correctly) and the adviser also took a percentage of the money that they were managing. It was not a good deal unless you really can't be trusted with your own money.

[unemployable]

I have a lot to say about this but it's not one coherent piece.

First, learn about the principal-agent problem.

You are more likely to "lose it all" when you hand over your money to someone else. They have access to the same markets you do; when the stock market crashes it crashes for everyone. Plus there's the risk they blow up buying something esoteric you don't have easy access to, or take your money and get on a plane to Fiji.

If you pay an adviser 1%/year and you're on a 4% withdrawal rate you're paying him three months of living expenses. January, February, March. Just sign it over. This is, as mentioned, on top of whatever high-fee low-performing vehicles he sticks you in.

You're also paying for the adviser's career risk. Jeremy Grantham talks a lot about this. People in the asset-management business are biased against thinking (and saying, and acting as if) the stock market will decline because their careers are tied to it going up. OTOH they don't want to lose their clients and jobs if it does decline so they're also biased towards keeping some of their client's money in low-risk, low-return assets, even when this is sub-optimal. There's a strong bias to do what everyone else does, because the career risk to sticking your neck out and being wrong is greater than the benefit to doing so and being proven right. This is how we end up with things like the standard 60/40 mix and every large shop out there sounding the same.

What do you really need help with? The very best people in the business -- some of whom I have met and reviewed professionally -- don't have all the answers and some dude at Merrill Lynch who has your account is several rungs below that. If you think the crash is coming in a few months put something in long-dated Treasuries. If you think it's coming tomorrow keep it under your mattress, maybe buy gold.

The longer I'm at this, the less difficult I feel like this whole investing thing is. I say that as someone whose career has been in the asset management business and who has experienced two separate 50% declines in the stock market first hand.

[IlliniDave]

I'm sure there are good fee-based advisors out there. I would tend to shy away from someone who takes a cut of assets-under-management (AUM). But that's a personal thing. Find someone is up front about how they get paid (maybe it's just me but if it is via sales commissions, I'd run away), and beware they are not going to be steering you into insurance products (unless you thoroughly understand the products, and their fees/costs, and decide that's what you really want anyway).

[classical_Liberal]

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[unemployable]

Kitces has an article about management fees and WR. It's not 1:1 (according to the article).

An investment adviser saying investment advisers aren't as expensive as they seem. Shocking!

Reminds me of the ways hedge fund managers defend 2 and 20.

In all seriousness, he has a point, and I do like Kitces' work in general. I tend to think of withdrawal rates in real-time, as in what am I running at this year and even this month. This is not the typical SWR framework, of course, where you start at x% and index x by CPI/COL.

Still, when his two arguments are "if you retired in 1966 you were screwed anyway" and "if 4% or 3.6% doesn't fail why worry and never mind I end up making even more in fees"... well, I'd still rather have that money myself.

[slowtraveler]

Don't we all do this when we employ someone to build a pooled mutual fund of any sort?

I currently pay the Wellington Management company around 22-45 basis points* depending on the holding. I've been happy so far with the results.

*Wellesley and Global Wellesley

[unemployable]

Don't we all do this when we employ someone to build a pooled mutual fund of any sort?

Yes, technically, and this includes Vanguard.

I'm spending about $1,000/year in fees myself on actively-managed funds, as opposed to what the fees would be for index funds. And I'm wondering why I should keep paying so much, although the fee total didn't reach that much until recently due to market gains. TBGVX if anyone is curious. They do hedge currency exposure back to the dollar, so that is one reason to hold them, plus I like the putative "value" exposure.

[classical_Liberal]

...

[Sclass]

The answer to this question depends on a bunch of things. Like, how good an investor you are, how good your paid advisor is, how much they charge. Any bad combination of these can wreck your financial future.

I think using a pro can be a part of everyone’s bag of tricks. Personally I use one for a small portion of my savings. Kind of a rainy day fund if I fall on bad luck. As things stand I think I’m faster at building wealth than these guys but they are more consistent. And so I pay for that.

How much one allocates to these people depends on how well either party will do with the money in their hands. In a limiting case where I’m unfit mentally I will allocate more management to the pros. Maybe not the same pros but certainly outside parties.

Edit - I should also stress that I don’t always agree with the thought process of my manager. I guess that’s why I hire them. Makes sense if we were in total agreement there would be no point in handing over the 1.125% to them.

[suomalainen]

What is a "good manager"? How would you be able to pick one? What are the odds that you are terrible at picking "good investments" but incredible at picking "good managers"? And if you could imagine a "good RETAIL manager", what makes you think they'd be running retail money? "Good retail manager" is an oxymoron. Good managers run hedge funds and everybody knows they ALWAYS beat the market...oh wait...the 5 and 10 year returns in the HFRX Global Hedge Fund Index is...wait for it...2.34% and 0.18%, respectively, compared to 15.96% and 9.97% for the S&P 500. Those figures are as of January 24, 2018. I get a report daily that updates those figures.

I looked at my sister's manager's picks for which he charges ~1.4% IIRC. It was a smorgasbord of index funds - some international, some domestic, some large-cap, some small-cap, some bonds (again, international, domestic, long duration, short duration, etc.). And each of those index funds charges fees on top of his fees! It's fees all the way down!

1) The only thing you know for certain in any investment is what it costs.
2) EVERYBODY measures future performance against the market and tries to "beat the market". By definition, 50% of managers will beat the market and 50% of managers will not beat the market because guess who makes up the market...that's right, people who manage money (be it institutional or individual). It's a coin flipping contest. How are you going to figure out who has the best talent for coin flipping?
3) Ergo, buy the market at the lowest possible fee.

Investment advice: Open a Vanguard account. Pick your favorite markets (equity, bond, international, domestic, etc) and never sell. 60/40 equities/bonds is a popular allocation and you throw in occasional rebalancing and voila, you're a fucking genius who beats 50% of all managers.

-common sense guy

[Sclass]

The SP500 has had some dismal years like the lost decade. Meeting it should hardly put a feather in your cap. I’m shocked how the industry still uses it as a benchmark. It’s deeply flawed in that most of its value is concentrated in five stocks, not 500. But it is what it is. Perhaps the market for investment services is driven by people who can only see this much.

The management company I’ve used has done narrowly better. Some quick keystrokes on the Hp12c show they did 7% from 12/2000 to 12/2017. The SP500 index did 4% according to an online SP500 return calculator I just googled.

This is after fees because I’m just looking at what I dropped off there in 2000 and comparing it to my account balance today minus scheduled withdrawals. Whats 3% when you actually have to track down and identify a manager? I’ll take it but it is nothing to write home about. Hmmm, I think I forgot to include taxes.

The lost decade for the 500 from 12/2000 to 12/2009 makes me raise an eyebrow. Mostly because these were the years I was employed and saving for early retirement. It would have really sucked if I’d listened to the company dogma to max out my 401k and put it in the 500.

YMMV. You could do better or worse. For some folks emptying their spare change into a pickle jar every night may be winning advice. Think it through before taking any course of action. Like I say, it depends.

[suomalainen]

@sclass, fwiw my post wasn’t directed at you.

To address your points, you lucked out by picking a lucky manager. 50% of folks will. It’s just statistics. But if you take a closer look at the data (not anecdotes, but data), you will find that there is ZERO correlation between a manager’s performance from one year to the next. I believe they call it persistancy, but I may be wrong about that.

In any event, my question, I think, remains a good one: how do you pick a good manager?

[unemployable]

The SP500 has had some dismal years like the lost decade. Meeting it should hardly put a feather in your cap. I’m shocked how the industry still uses it as a benchmark. It’s deeply flawed in that most of its value is concentrated in five stocks, not 500. But it is what it is. Perhaps the market for investment services is driven by people who can only see this much.

Geez, it's hard enough to get people to stop looking at the DJIA.

We used VTIAX (the index, not the mutual fund) for the US stock market at our shop.

It's closer to the top 30 stocks that are highly correlated to the entire index. Top five are AAPL, MSFT, AMZN, FB and BRK, giving you about 12%. Top four are all tech.

You could come up with some equal-weighted index comprising SPX, MID and RUT if you wanted, but anything other than cap-weighting has been long deprecated. But I guess that's part of the great conspiracy.

[BlueNote]

I'd consider using one if they were just paid some reasonable fee to invest according to my allocation. Problem is I don't want to pay thousands of dollars per year to have someone do a few simple calculations, double check those calculations and then execute a trade or two each month. There are no Robo's in Canada that are cheap enough and flexible enough to invest my allocation yet but I figure that's the future. I'd be willing to pay up to ~$300 a year just for the convenience of having someone/something else do the grunt work. However a reasonably priced fee only advisor who follows a rational process could very well be worth thousands of dollars a year for the layman who is able to contribute savings but is hopeless at allocating, investing, tax efficiency etc. Also useful for keeping you from doing really stupid stuff as mentioned, the coach factor can be worth it.

[Sclass]

It's closer to the top 30 stocks that are highly correlated to the entire index. Top five are AAPL, MSFT, AMZN, FB and BRK, giving you about 12%. Top four are all tech.

Oops, I guess it wasn’t as bad as I thought. My bad.

[Sclass]

@sclass, fwiw my post wasn’t directed at you.

In any event, my question, I think, remains a good one: how do you pick a good manager?

No matter. You raise valid issues. I get it, most managers suck. Some like Madoff really sucked. My broker has a risk tiered service that kinda sucks. There are all kinds of results to be had.

I was just trying to say you need to be careful about giving up too early and going for the index. For some it is an excellent choice. For me, meeting the market isn’t good enough. It never was and I’m glad I didn’t take that hand.

I picked my manager after reading some of his literature and his mentor’s literature. His name kept coming up over the years for making money in stocks I analyzed and acquired. He’d basically boast that he recommended and bought XYZ Corp and I’d notice I also had a stake in it. I got curious about his “style” so to speak and bought into his service to learn more. He’s on a list of one for me, that is, I’d do it myself if I didn’t use his service. Though I like them I only keep 20% of my money with them.

So, I guess I don’t know how to pick money managers. I choose to DIY.

Good luck.

[IlliniDave]

For me, meeting the market isn’t good enough. It never was and I’m glad I didn’t take that hand.

You asked earlier why everyone uses the SP500 as a benchmark. This is why. If the goal is to beat the market, the market the natural thing to compare results with. Granted a total market index would be a more accurate representation of the returns on all the money invested in the stock market. But the SP500 is a decent proxy.

If you don't mind my asking, how did your manager do in the 9 years following the lost decade (12/07-12/17)? If he beat the SP500 total return by 3%/yr again, I might want to give him a call!

I tried for a time to beat the market w/my 401k. Sometimes I did, sometimes I didn't. As best as I can calculate (I only have data back to 1991) I've beat it by about 0.2%/year. It was a combination of dumb luck and taking extra risk in small caps and overseas. In time I'll surrender that lead because I'm now about 30% in bonds and 3% in cash, which drags on the total portfolio's return. The rest is predominantly in index funds although I still overweight small caps, and hold some ex-US developed and E/M. So I'll lag behind during bull markets and come out a little ahead in bears (which is a bigger concern now). Nowadays my speculation is limited to my relatively small backdoor Roth IRA which I started in 2011. So far I've been clobbered by the SP500 TR 15.5% to 9.9%, but I'm playing a longer game than 5 years. The 9.9% is dollar-weighted too. I'm too lazy to try and dollar-weight the SP500 returns equivalently. Dunno if that would show I've done slightly better or slightly worse.

[7Wannabe5]

The market is only a market.