Should you hire a money manager or do it yourself? Consider the following assumptions and arguments.
1. As the first given, the portfolio belongs to you, not the hired money manager. This is an obvious, yet important point.
2. Assume the advisor fees amount to 100 basis points or 1%. Fees may be lower, but for ease of calculation, I will use the 1% level.
3. Assume the portfolio earns 10% per year. This is likely high, but for ease of calculation I will use the 10% figure.
4. Based on these two assumptions, if you hire a manager you are now paying ten cents on the dollar (1% of 10% = 10%) for this return. That is a heavy burden to bear.
5. Although 10% is high, this is not the end of the story. Now one needs to calculate the difference between the portfolio return and the return from an index fund or benchmark. At an investment meeting, just this morning, I heard that the average investor ends up paying over 100% for portfolio performance in excess of the index return. Think about that statement for a moment. Assume an active manager outperforms the market by 50 basis points, but you are paying that advisor 100 (1%) to manage the portfolio. In this situation, you are paying more than 100% to outperform the market. This logic is assuming the portfolio outperforms the index fund, an unlikely outcome.
While advisors do serve a role, the cost is very high for the investor who needs their services.
Photograph: Compression caused photo to be blurred.