I teach people how to manage their assets. Why? Because I feel people overpay for investment services and generally get poor service. You have to understand this going in. I'm biased on what I'm about to present.
For some people all of this investment stuff doesn't matter. They say they are happy with their investment advisor. Then they turn around and rant about how they don't have enough to retire. This is worth thinking about as you view the following.
A third point to keep in mind is that financial planning and investment management are two different endeavors. You could get a sophisticated financial plan done by a financial planner and then have the assets turned over to Warren Buffett to manage. Again, they are separate functions. There is considerable confusion on this topic in the blogosphere. Let me be clear: for many people, a well done financial plan is worth paying for and, in fact, I've seen costly financial plans pay for themselves as the planner spots an attractive tax savings etc.
What we are going to look at is solely investment management. Specifically we'll think about how much could be saved managing your own assets. What we'll find is that the savings are huge - this isn't the old "change your own oil" tactic from graduate school days. This is meaningful savings. It is the difference between being able able to retire comfortably and not.
Regular readers of this blog know I like periodic tables of investment returns and especially the Table put out by
BlackRock for the 20 year period ended 2009 shown here:
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| Source: BlackRock |
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CLICK TO ENLARGE Granted there are many paths we could have gone down but this is one path we did travel. It seems that every time I look at this chart I learn something new. It shows the value of diversifying, why not to chase hot sectors, and the biggest ups and downs of the past 20 years. It also gives us what we need to calculate the cost of investment management. But first, let's backup and visualize what we are considering.
Google "wealth mangers" along with your zip code and you'll find at least 10 wealth managers within 25 miles, say, of where you live unless you're in the Amazon jungle or the North Pole. Call the 10 wealth managers and tell them you have $1.0 million in assets and you need help managing it.
To make a long story short they will gladly manage it for you at a fee of between 1% and 2% of the market value of assets. Thus, the first year fee on your $1.0 million will be approximately $10,000.
The question we are interested in is the cost of professional management if we had gone back 20 years ago to 1990. What would have been the impact on the portfolio of professional management at 1% versus managing it ourselves? Keep in mind that assets typically need to be managed over much longer periods so we are actually looking at a short time frame - maybe someone in their mid 40s with a couple of rollover IRAs and 20 years to retirement.
This is not the place to point out that professionals, after fees, underperform markets over the long term. If you need evidence of this please do not hesitate to contact me. We are going to assume that the investment manager achieves the returns of the diversified portfolio in the BlackRock table.
We'll also assume that the investment manager gets paid at the end of the year. In the real world investment managers are paid at least quarterly.
Using the returns provided by BlackRock produces the following results for our little experiment:
| YEAR | PORTFOLIO | RETURN | YEAR END | FEE | VALUE 2009
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