Professional Management Equals Better Returns
Does more expensive mean it’s better?
I know that’s always something where we think, or if it’s too cheap and that means that it’s not good quality.
Sometimes we think the more we pay for something, the better it is. But we all know that’s not always the case.
For example, sometimes we go to events like a wedding and they’ll have this huge, fancy dinner. But truthfully, you may get a better meal going to the local diner.
So, expensive may or may not mean better. It doesn’t always mean that if you pay more, it’s better.
But what does that have to do with finances? Well, it has to do with your fees.
If you’re paying someone to professionally manage your money, does that mean that it’s really better?
It might look better, it might have a great presentation like that fancy dinner on the plate, but it might not taste great.
The returns might not be as good as you want, or at least they might not meet your personal benchmark.
Expensive doesn’t always equal better.
However, sometimes you’ll find that expensive restaurant that you would pay anything for because the meal is so great and every time you go there, you rave. It’s not about the cost, it’s about the experience and the value.
We’re continuing our series on common portfolio wisdom where we’re examining things that have often been said and looking at it to see if it’s really true or a half-truth.
What we’re covering today is whether professional management always equals better returns.
A professional singer is always going to be better than me. We think because we have professional management, we’re going to get better returns.
But the fact of the matter is that that doesn’t always work.
There are always different market strategies like modern portfolio theory or all these different tactical management strategies and they all do well in certain markets, but the truth is that it doesn’t really matter.
It’s market trends that matter.
Professional management could be great in one market, but not in another, so it doesn’t always equal better returns, meaning there’s no one magic bullet. There’s no one strategy that will always do the best.
Nor do all professional managers perform the same way.
For example, my brother is a professional plumber and I will tell you he always gets the calls from the high-end clients because he does his job better than the others on his team. They are all plumbers, all in the same department even but he does better work.
We always know there’s a difference, so just because you have professional management doesn’t necessarily mean that you’re going to have better returns.
In fact, oftentimes you would have been better just in an index fund over the long haul than you would with many professional managers.
Just because you’re paying for professional management doesn’t mean you’re getting better returns.
So let’s give you some things to think about or questions to ask if you are paying for professional management of your funds.
We can always kind of look back in history and see where our returns have been, but as always, we want to be forward-thinking. Were past returns an anomaly? How will they manage if this or if that happens?
So whether you’re in an advisory account right now, or you’re paying someone to manage your money, or you’re going to look into it in the future, I want to give you a couple of key questions that you want to have answered.
We have three key questions plus a bonus one to make sure that you are going to actually get better returns for the price you’re paying.
But first, let me define better returns. Better doesn’t always mean beating the market. Really, how we look at it is you should be having somebody who’s managing not to beat the benchmark or the S&P 500. But how to make sure they’re managing to your personal benchmark.
Your Personal Investing Benchmark
Your benchmark is defined by asking yourself a few questions.
What is the average return you’d want to have?
Put down a number. Just put down something that you might say is a reasonable return. Something you’d like to see every year.
What is your “uncle” point?
That is, what is the most you would lose before it would really cause you pain? Put a dollar amount, not a percentage.
Lastly, which one is more important? To make that higher return every year or avoid the loss beyond your uncle point?
Now this along with your time frame becomes your personal benchmark. This is the standard by which your accounts should be managing too.
So oftentimes our portfolios don’t beat the S&P 500 in a good year, but I can tell you that they often or almost always don’t take as much hit on the downside either.
We’re building portfolios that meet our clients’ personal benchmark versus just trying to beat some industry benchmark.
Professional Money Management Fees
The first question you want to ask is, “What are you doing for your fees?”
Sounds simple, but it is very often overlooked.
Just ask the question and sit back to hear the answer.
What are the things they’re doing just?
If you’re paying somebody to do something, don’t you think you should have a good idea of what they’re going to do for those fees?
It would be kind of like hiring someone to come and take care of your yard.
You might have it in your head what you want them to do, but if don’t specifically tell them or ask them what they’re doing for their fees, then you might get a whole different outcome than you expect.
Ask, “What is your downside risk management strategy, or what’s your investment strategy as a whole?”
Since most people are concerned about the downside, I would make sure you know where they stand.
How are they deciding?
Do they just have a general strategy based on your age and at certain points they make changes?
You want to know what their investment strategy is and if downside risk is important.
What’s their downside risk management?
If the market is going crazy, what are they going to do about it?
If they tell you to just hang on, it’ll be back, maybe that’s not exactly your fit.
Maybe you want them to be doing something.
Recently we were reviewing a portfolio and we were going through this with a client and she had been paying them a big number in fee management every year.
When we dig into it, we see the trades are kind of just like robo rebalancing trades.
So to ask this question, “What are you doing for your fee, and what’s your strategy?” became really important to know.
Investment Strategies and Robo Investments
3) How do they determine when trades are happening?
Is their investment strategy and trades all robo?
Like when the computer says to sell, they sell when the computer says to buy they buy?
Do they just make changes at certain ages?
If they trade based on one signal or another, then often they can get whipsawed and you lose (I have seen this happen many times before). They didn’t look at the whole big picture.
There should be a computer element and a human element when making trades.
Now, here’s the bonus thing that I think is really important.
If you’re taking income from your account then, how are they going to protect your income?
It used to be 6% that you could take and not run out of money. (and honestly, you can still get 6% income if it’s managed the right way)
But many experts dropped the 6 down to 4%, then 3% in some people, some articles even say 2.8 %. Why?
Because a big loss will hurt you more than the big gains. And a big loss early on in your retirement can completely derail your retirement income.
So what are they doing to protect your retirement income?
Professional management can be great. There are some great managers. We use some really awesome money managers!
But on the flip side, there’s some bad management where you’re just paying extra amounts and extra fees and you’re getting no better performance than if you were in a simple, very low-cost fund.
Professional Management doesn’t always equal better returns.
You have to decide if the value is worth the fees.
If you have more questions or want to know more in detail about how we would answer all these questions, just let us know!
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