How Much am I Saving by Managing My Own Investments?

[nico08]

I was just wondering how much money I save by managing my own investments? I understand that investment advisors charge anywhere between .5% and 2.0% annually of your portfolio's total value. This fee needs to be paid even if your portfolio does not increase in value for any given year.

I also understand that you can pay some investment advisors by the hour. But about how many hours on average would someone spend on a typical portfolio and what would the average hourly rate be?

Assume for the sake of discussion that the investment portfolio value is $500,000.

Thank you for your help.

[H2ODude]

Well, IMHO it's a matter of learning enough to get comfortable. Lopping off ~1% of your returns every year doesn't make sense to me. It seems to me that you need to get comfortable with an asset allocation and the volatility it will generate for you (with corresponding heartburn) and then use mutual funds, preferably index, to fill out the dance card. That's what I've done for over 25 years and it's worked well. The trick is, and it's well covered in threads here, to hold your commitment when things go south. Timing works occasionally for a lucky few I suppose, but it's not recommended.

I've been a loyal customer of Fidelity for these years and a few months ago got a quote on them managing it. Their proposal of funds allocation didn't make much sense to me, about 25 for a portfolio a few times what you've described. Maybe it's just me, but I can't see putting <1% into anything. So I'm still allocating it out myself.

Anyway, investing for retirement is a long term sport. I'd recommend reading and learning enough to get comfortable with setting up an AA and doing it yourself.

[frayne]

What water dood said, in spades.

[NYEXPAT]

.5% is way two low unless you are talking $3 million or more all in bonds. When I had my firm the industry was charging .75% for bonds and 1.25% for stocks. Most clients did not have mixed AA and usually had more than one adviser.

When you get into hedge fund territory 2+20 is normal compensation.

[Midpack]

1% is pretty typical. But there are excellent portfolio advisors with fees at 0.25% of portfolio, recently discussed here. I'd be very comfortable with them, but I don't use any advisors. I hesitate to name anyone as I make no recommendations.

[easysurfer]

Also, remember in a terrible market, not only does your portfolio take a whooping but you'd still be paying the advisor fee.

I'd much rather manage my investments on my own (keeping it simple with indexing, AA, dollar cost averaging, rebalancing) than hiring someone.

[samclem]

And, some advisors will helpfully sign you up for funds with load fees, that can cost 4% or so at a whack. And if you're not running the show, the advisor might sign you up for funds with industry-average expense ratios, which are about 1% higher than the low cost ones you might pick for yourself. You'll pay that extra percent every year on top of the advisor's fee. And, if you're lucky they'll actively trade stocks, ETFs, and funds for you, and you'll get to pay a commission on those trades (figure $9 each).

[Nords]

Quote:

Originally Posted by midnighter777 I was just wondering how much money I save by managing my own investments? I understand that investment advisors charge anywhere between .5% and 2.0% annually of your portfolio's total value. This fee needs to be paid even if your portfolio does not increase in value for any given year.

That's a very interesting question.

It probably goes beyond the money paid to a financial advisor, to the expense of the college seminars that it would cost you to learn for yourself what you could pay a "professor" to teach you.

Of course you'd have to hold your own hands when the market tanks. Or post here to have a group therapy session.

About three months ago my daughter said that she didn't want to manage her own investments because she didn't want to have to sit in front of a computer all day keeping track of them. I realized that's what she thought I was doing every day when she saw me reading e-mail, reading E-R.org, writing, blogging, playing Windows Solitaire...

My breakthrough was when I said "What do you do with your iPhone in your hand all day?"

[foxfirev5]

Right on Nords. While I observe much of the daily events I rarely react. Also, I truly do not understand the constant texting of the next generation. It appears to me that they're losing out on what is right in front of them.

[easysurfer]

Quote:

Originally Posted by foxfirev5 Right on Nords. While I observe much of the daily events I rarely react. Also, I truly do not understand the constant texting of the next generation. It appears to me that they're losing out on what is right in front of them.

Yes, they are losing out. It's called picking up the phone to talk to somebody! instead of all the texting.

[ChiliPepr]

Quote:

Originally Posted by midnighter777 I was just wondering how much money I save by managing my own investments? I understand that investment advisors charge anywhere between .5% and 2.0% annually of your portfolio's total value. This fee needs to be paid even if your portfolio does not increase in value for any given year.

I guess it all depends on if you actually do a better job than the advisor does. It is sort of like how much will you save taking out your own appendix instead of paying a doctor.

Does the average untrained person make more of a return than the average professional? Is that the case all the time or just when the market is up? Is down?

I completely understand if you are just buying a portfolio of index funds, keep it allocated and rebalance when needed.. You may outperform an actively managed mutual fund.... Put if you are planning on buying stocks and managing individual stocks, I think it is less likely.

[Birchwood]

From about 30 years of my DW and I doing our own, we have committed all the possible mistakes, from wrong AA, wrong diversification, buy and hold mistakes, and buying a bunch of bad stocks.--- but I will not have it any other way. All in all, we have done well without the help of a CFP.

You can be very involved or be as lazy as possible and with a little bit of AA and diversification and indexing, you can do as good as those with a CFP.

Of course, the drawback, is a lot of paperwork. Personal finance studies is also tedious, requiring a lot of patience and time. Some people find it intimidating or annoying.

1% a year, can be a big amount, if you have millions, well it's 50k/year for 5M, whether you are winning or losing. I like to spend that extra 50K if I have that much. I rather take the monotony of doing it myself and enjoying that extra cash.

[scrabbler1]

Quote:

Originally Posted by H2ODude Well, IMHO it's a matter of learning enough to get comfortable. Lopping off ~1% of your returns every year doesn't make sense to me. It seems to me that you need to get comfortable with an asset allocation and the volatility it will generate for you (with corresponding heartburn) and then use mutual funds, preferably index, to fill out the dance card. That's what I've done for over 25 years and it's worked well. The trick is, and it's well covered in threads here, to hold your commitment when things go south. Timing works occasionally for a lucky few I suppose, but it's not recommended. I've been a loyal customer of Fidelity for these years and a few months ago got a quote on them managing it. Their proposal of funds allocation didn't make much sense to me, about 25 for a portfolio a few times what you've described. Maybe it's just me, but I can't see putting <1% into anything. So I'm still allocating it out myself. Anyway, investing for retirement is a long term sport. I'd recommend reading and learning enough to get comfortable with setting up an AA and doing it yourself.

Two years ago, I was contacted by a rather pushy Fidelity Account Executive (he told me he replaced my existing one; he likely poached the other rep) who wanted to take over (from me) managing my account. He was as pushy in person as he was over the phone. After losing two hours of my life I would never get back in a face-to-face meeting with him, I had already mentally written a complaint letter to his boss by the time I got out to my car.

A week or two later the office manager called me to discuss my letter and he switched me back to the previous rep who apparently was unaware of what had happened. The manager was also unaware of my being switched and, he told me, he should have been informed.

My current AE has been helpful for a few minor issues without being pushy which is all fine and good.

[NYEXPAT]

I think some people confuse "investment advisers" with CFP's or are employed by brokerages. My family had an investment advisory firm from the late 50's till 2000.

We managed about $150 million for many Broadway producers/Entertainment lawyers/Entertainment accountants. My father (founder) and later myself held no professional designations. We had a simple 1 year contract (renewable every year)and a LPOA. If the client was not happy he could walk away at any time (revoke LPOA) and stop making the quarterly payments. The client was never given any promises (re performance) but it was expected that you could consistently beat the Major benchmarks by a minimum 3-5% in up or down markets. Most clients were referred by professionals (whose money we managed) and performance was more or less equal in stock only accounts.

The client funds were in a bank or brokerage of their choosing. Commissions were at whatever rate the client had with their bank/brokerage and were not computed in our performance.

Throughout our 50 years we never invested in a mutual fund/ETF or anything other than NYSE listed company or an ADR that was listed on the NYSE.

I do not recall ever not beating the averages but we did lose clients periodically but our "money under management" grew virtually every year.

While the business was a "cash cow", we held a fiduciary responsibility and could be sued (personally) by a current or former client for any losses as a result of our actions.

This should not be construed as an endorsement for Investment advisers and I personally would never hire one, but I understand why others would.

[urn2bfree]

I just recently investigated a lot of this and you can look up my thread on it....basically there are some real measurable gains that might be gotten from an advisor. I am not talking Active investment advice because I am convinced by the evidence that in the long run Passive will outperform trying to guess who is the Smart Advisor this year.
I chose to have advisors because only they have access to what I am convinced are the superior passive investment vehicles, DFA stock funds...for their ability to keep expenses low, tax consequences low, and track or beat the indices they are supposed to track. Also trying to figure which and how much of the tax free stuff to put where is beyond my free time.
Up until this year I paid 0.5% of Assets Under Management (AUM)because in my area of the country that seemed a good deal. now with the Internet freeing me to consider beyond the local zip codes I discover there are those who do it for 0.25% . And those who charge hourly--which to my mind makes more sense with passive investing..Passive is about keeping the balance of your $$ in the correct AA. (not just stocks vs bonds but large vs small, value vs growth, international vs domestic, etc) So it takes no more to do that for $500,000 than for $5 million..if your $$$ is on the lower end, the low % of AUM will be similar to the hourly...which runs from $1000 to $4000 a year depending on the number of portfolios a family has to manage. PM me if you want to know more who I hired ultimately. with our larger portfolio we will be saving over $10000 this yea and if our $$$ grows our expense to the advisor won't somthat is more saving every year. Also stats show the DFA funds do get you about a 1-2% advantage over Vanguard in the long run, so as our portfolio grows I am expecting tens of thousands of dollars more as a result of making the switch we made.

[Nords]

Quote:

Originally Posted by urn2bfree Also stats show the DFA funds do get you about a 1-2% advantage over Vanguard in the long run, so as our portfolio grows I am expecting tens of thousands of dollars more as a result of making the switch we made.

You're gonna have to back that up with a reference.

[FinanceDude]

Quote:

Originally Posted by Nords You're gonna have to back that up with a reference.

[M Paquette]

Quote:

Originally Posted by urn2bfree stats show the DFA funds do get you about a 1-2% advantage over Vanguard in the long run, so as our portfolio grows I am expecting tens of thousands of dollars more as a result of making the switch we made.

I think you'll find that if you compare the contents of the outperforming DFA fund with a 'similar' Vanguard fund, using Morningstars fund x-ray or similar data, that the DFA fund is weighted differently, with a slightly riskier mix than the Vanguard fund. They'll have a higher weighting of small cap and value stocks, following the Fama and French Three Factor Model.

I use the same math to reweight my whole portfolio, with a total stock market core, and a bit of small cap and value to raise the probability of better returns, with a slightly higher equity risk. This keeps my expenses down compared to using DFA funds.

[REWahoo]

Quote:

Originally Posted by urn2bfree ....basically there are some real measurable gains that might be gotten from an advisor.

It's that 'might' part that gets in the way of most of us DIY investors.

[donheff]

Quote:

Originally Posted by ChiliPepr I guess it all depends on if you actually do a better job than the advisor does. It is sort of like how much will you save taking out your own appendix instead of paying a doctor. Does the average untrained person make more of a return than the average professional? Is that the case all the time or just when the market is up? Is down? I completely understand if you are just buying a portfolio of index funds, keep it allocated and rebalance when needed.. You may outperform an actively managed mutual fund.... Put if you are planning on buying stocks and managing individual stocks, I think it is less likely.

I'm not interested in managing a portfolio of my own stocks but if I was I would either do some serious studying first or try to figure out what Warren Buffet to hand the $ over to. Do fee advisors in the 1% range actually hand pick and actively manage a selection of individual stocks and bonds? I thought most of them pick a handful of mutual funds and send you on your way, albeit with a checkup every few months to see if things need re-balancing.