Are Your Investments Working As Hard As You Are?

How do you want your portfolio to work? If the first words that come to mind are “More, harder, faster!” then you may need a portfolio review.

Let me tell you about a new client of mine who came to me for a portfolio review. She’d done enough reading online to know that excessive fees could significantly reduce her returns and her ability to retire. Her advisor strongly suggested that active management, and the corresponding higher investment returns, justified higher fees. So she sought an independent second opinion. But instead of asking for an opinion on her portfolio, she asked a different question, “Did my investment advisor’s performance produce results that were better than the broad market performance and, in turn, were his fees justified?”

Ideally, her advisor would provide rates of return for her portfolio since the account was established. (A few, not all, advisors can provide this information.) Unfortunately, her advisor could not. So, for comparison purposes, I created a low-fee portfolio, mostly index funds and exchange traded funds (ETFs) with a very similar asset allocation, which was left completely unmanaged.

And how did her actively managed existing portfolio compare to the unmanaged portfolio? The managed portfolio showed:

Higher volatility and more risk

  • Slightly better performance – .33 – .7% for three months and one year respectively
  • Definitely worse performance – 1.55 – .12% for five and ten years respectively
  • Higher fees – up-front fees, including sales loads of 2.5% to 5.75 %. The unmanaged portfolio had no such fees.
  • Higher annual investment management fees of .61- 1.35%, on top of up-front fees, compared to .05-.16% for the unmanaged portfolio.

Not exactly what I would call “above average” performance, especially when you consider the higher volatility and the increased risk.

Why did the managed portfolio perform worse than the unmanaged portfolio? There could be many reasons, including poor investment selection and bad timing on the part of the market-timing investment manager. But what is absolutely clear is that with the higher expenses, including front end loads of 2.5 – 5.75%, it is unlikely that even the most brilliant investment advisor or market timer will perform so well that it wipes out the cost of the load fees.
It is possible to avoid front end sales loads and use actively managed mutual funds. Unfortunately, the portfolios I see that have no-load funds are managed by an advisor who adds another layer of fees that are a percentage of the assets being managed.

What’s the answer? Let an independent, hourly-fee advisor design a passive portfolio you can implement using low cost index funds or ETFs.

Are you still not sure? Want some additional clues that you need a portfolio review?

  • Your portfolio is not growing.
  • You think that you don’t pay any investment management fees.
  • You lie awake worrying about the portfolio.
  • You have no idea of what you’re paying in fees, but you’re pretty sure that advisor is not working for free.

Whatever you’re reason, getting a portfolio review, and improving investment performance will help you eventually get to that point in life where you can stop working, but your investments don’t!