Now that we’ve looked at the available options for your investments, should you go the “do it yourself” route or seek professional investment management? Is it possible that you can select and manage your own investments?
I will suggest that it is not only possible but that it’s in your best interests to do just that. This is also known as self-directed investing. Let’s first look at some of the options for professional investment planning and management.
You can find a wide variety of organizations that offer investment management which may be referred to as portfolio management, wealth management, investment advisory or financial management. These services may be offered by banks, stock brokers, insurance companies or even some guy with a phone number and a website. Let me give you a recent example of what can go wrong with these services: Bernie Madoff. Yes, I know this is a particularly egregious example but it does serve to illustrate how even on a large scale people can turn over their investments to someone and have the results come out very badly. Mr. Madoff utilized a network of financial planners and advisors who established “feeder funds” and advised that their clients place their accounts with Mr. Madoff to invest for them. They would point to his fantastically consistent record of returns and the fact that Mr. Madoff had a professional background in the financial industry managing investments for almost 50 years. He cultivated contacts throughout the industry as well as within government including with high ranking officials at the SEC. With this background it was easy for financial advisors to convince their (generally) well-healed clients to entrust their savings to Mr. Madoff. Generally, you had to know someone to be allowed to have this opportunity. His clients were high worth individuals and many non-profit organizations who invested their endowments.
Mr. Madoff didn’t set out to fleece investors. He spent many years providing apparently completely legitimate results for his investors. However, at some point markets began to move against him. Ultimately, he was completely falsifying investment results and using new money being entrusted to him to pay out any earnings or redemptions requested by his clients. The very definition of a Ponzi scheme. The quarterly statements to clients were conjured up using a computer which was also used to generate a history of trades that never occurred. To top it off, Mr. Madoff was twice investigated by the SEC which found no evidence of any fraud or wrongdoing.
We know what happened to Mr. Madoff, but what about the financial advisors who funneled client money to him? They collected fantastic amounts of fees based upon the awesome “returns” their clients were earning. Many of these feeder funds has been investigated, some are under indictment and have been ordered to forfeit some portion of their profits earned during the period where results were being falsified. Naturally, they argue that they had no way to know that Mr. Madoff was defrauding his investors.
Now, I’m not saying that all investment advisors are crooks. However, for every Bernie Madoff, there are many less crooked and incompetent providers of investment management services. How are you going to tell which ones are not among this group? Depending upon how much you have to place under their management, the investment advisors will take somewhere between 1% and 3% of your account balance each year. This fee will be incremental to the fees for any mutual funds they may employ on your behalf. The fee structure may also depend upon whether they are putting your investments into some “standard” portfolio they have defined or they are “custom” designing a portfolio to fit your individual circumstances and objectives. Mind you, they will take this fee when their management of your investments results in gains or losses. Therefore, their results must outperform the overall market returns by at least the amount of their fees just so your results will be at least as good as you could get on your own with a broad market index fund or ETF.
In addition to what I have described above, there are Fee only financial planners. The “fee only” part implies that these planners will charge what amounts to an hourly fee to work with you to help structure your financial affairs. This can include anything from budgeting and saving for your child’s education to retirement planning and selecting the right insurance products. They generally do not “sell” financial products nor get commission payments from products they might recommend to you. They should be a Certified Financial Planner which is a stringent certification process and they have a fiduciary obligation to their clients. If you have issues or questions and would like some objective assistance to help structure your financial life, a fee based financial planner can be a helpful resource.
Another source of investing advice comes in the form of investment newsletters. These services come in various forms and with differing objectives but will generally offer a monthly (at a minimum) publication and will offer advice about the general direction of markets or more specific advice about what you should be investing in. Naturally, the results of following their advice can vary greatly. There are hundreds to choose from and they generally charge from $50 to $1,000 yearly for their advice. You can find a newsletter to fit most any market condition or investment approach.
So to return to the original objective, should you select your own investments or hire the services of a professional? Going back to an earlier theme, my view is that by using low cost index funds or ETF’s, you can match the performance of the overall market at a very low cost. Add in a dash of basic asset allocation and you can likely reduce volatility and improve your returns over the long term. While it may be possible to find an investment advisor that would deliver better results, how will you find that advisor? Plus, the price for a bad selection can be very steep indeed.