“If I should call you up … invest a dime … And you say you belong to me … and ease my mind." — from “Happy Together,” as performed by The Turtles
Part Two in a Three-Part Series
Let's say you've enjoyed an initial consultation with a fiduciary investment advisor. Now let’s talk about one of the most important yet rarely discussed issues in your potential new relationship. Who will actually be investing your assets and managing your portfolio?
The question appears counter-intuitive because the average investor assumes that the advisor being interviewed will choose and monitor the investments. And because this is sometimes not the case, oftentimes accountability becomes blurred and more fees can be involved for the investor.
Some advisors are “relationship managers” who recruit new clients but do not actually manage assets. And this is completely ethical. But you should understand that this is the arrangement when you hire him.
Say you hire the advisor, and they place your assets in a mutual fund. Somewhere there is a mutual fund manager, whom you will likely never meet, who’s choosing a basket of securities into which your assets are being placed. Two questions. “How has your advisor vetted this mutual fund manager?” and “What are you paying them in addition to your advisor?”
The average mutual fund investor significantly underperforms the mutual fund that they’re invested in. In addition, if you’re paying your advisor 1% and the mutual fund manager gets 1%, you’ve doubled your expenses.
Mutual funds by their very nature are not tailored specifically for your individual portfolio, nor are they customized for tax efficiency. So you’ve got your nest egg being managed by someone you’ve never met, someone completely unfamiliar with your unique financial situation. When performance flounders, some advisors evade this accountability by blaming a mutual fund manager, one whom they chose and hopefully vetted.
An advisor whose firm places client assets in individual stocks and bonds rather than mutual funds can also be a relationship manager, one who funnels the client’s assets to a money manager in the parent company. Thus, the vital question reappears, “Who is actually managing my assets?”
Now, let’s say the local advisor that you’re interviewing will actually manage your portfolio. Some advisors choose individual stocks and bonds, ETF’s, and other securities, rather than mutual funds, then monitor them and rebalance the portfolio periodically. They do this in-house, without the use of a third-party manager.
But whether they place your assets in a mutual fund, kicks the portfolio upstairs, or manages it themself, at the end of the day, your advisor is always accountable for your portfolio performance.
An advisor who actually manages the portfolio themself is usually much more directly involved with your holdings. If they are your face-to-face contact, they should be able to more clearly explain decisions regarding securities in your portfolio, because they are pulling the trigger themself. This arrangement may allow you a much more complete communication process during reviews of your accounts, and can very often be more cost-effective.
Margaret R. McDowell, ChFC, AIF, author of the syndicated economic column "Arbor Outlook," is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.