Where’s the Value?

I spoke to “Frank,” who wanted a second opinion about his “investment guy”. The guy in question was a fee-based advisor (score one) who charged Frank 1% for his $800,000 portfolio. “He’s a nice guy, but I’m not exactly sure what he does and what value he provides.”

Frank went on to describe that his investment guy (“IG”) did not actually manage his accounts, but used a variety of managers that outside experts determined were the “best” for IG’s clients. Frank said the reason he wanted to talk is that IG became a bit testy when asked about the added cost of using the extra layer of advice. “All I wanted to understand was what IG was actually doing for his 1%.”

This is one of the more confounding questions for investors who choose to work with an advisor. If you are paying an advisor 1% to manage your accounts, then ostensibly, the advisor is actually doing something, not simply putting your money into a fund of funds. To some extent, advisors who do not actually manage your money are not much better than their commission-based brethren. Do you really need to pay an advisor 1% to tell you to maximize your employer-sponsored retirement plan?

The conversation made me think about a recently-published book called, “Full of Bull: Do What Wall Street Does, Not What it Says, to Make Money in the Market” by Stephen McClellan. McClellan was a top-ranked analyst on Wall Street for 32 years and in his retirement, he has blown the cover off of many Wall Street institutions and labels individuals as naïve investors who “take Wall Street literally.” The book is designed to “expose the puzzling, deceptive, conflicted behavior of Wall Street that so disadvantages individual investors.”

McClellan speaks to Frank’s issue: investors should understand that their broker or adviser is NOT an investment expert, but a salesman paid to sell his firm’s product, whether a mutual fund or the amorphous category of “investment management.” One way to discover exactly what your adviser is selling is to ask a specific question: do you manage the money yourself or do you hire sub-advisors to make the decisions? If he or she gives you some jive-talk about how the firm has engaged other firms to identify and select the best investment managers, then you know that you are paying a bunch of money for calculations that you can do yourself online, because the “adviser” doesn’t want to or can’t manage money himself. As Frank asked, where’s the value in that arrangement?