Mail Bag: Investment Advisor or D-I-Y Investor?

by Brad Ferris on November 18, 2013

Reader Karin writes,

We have an investment advisor, who seems to have several advantages over us: more access to products and bonds than on our discount broker, more time to manage and research good investments & staff to support. But it costs a lot. We have tried investing on our own before, but got totally stressed…saw our investments decline in value….we didn’t know enough and switched strategies too often. Our goals are to get better at investing, be able to sleep at night, not pay too much in fees, not spend too much time on investing and achieve decent returns.”

What Karin writes about is a fairly common theme when readers sign up for my mailing list and write in to share their stories and struggles. A few past (and current) clients have even had these exact issues.

Karin, like many investors, wants to be successful, keep costs low, understand what she’s investing in and be able to take time away from investing for professional and personal time.

The difficulty is that often those expectations and wants come into a conflict with reality.

Karen mentions in her E-Mail that she is looking for 6% real growth (after fees and inflation) and also to earn that return in a tax efficient manner.

So let’s examine how difficult this task may be…

Let’s for a moment assume that we’ve constructed a DIY (do-it-yourself) diversified dividend growth portfolio (a client’s portfolio).
Value: $500,000
Annual Inflation: 1.8%
Beta: 0.64
Yield: 3.0%
Annual Dividends: $15,000
Trading Fees: $3,000 (300 trades at $10) or 0.6%
Taxation: 16% (capital gains & dividends)

We’ll use the TSX60 as a benchmark for what to expect in annualized returns. The TSX60 over the past 5 years has been (roughly) at 2.5% and over the past 7 years at 7.5%. Let’s assume a conservative 4% growth in annualized returns.

Even at first glance 6% real growth will be difficult if you factor in a conservative annualized return, conservative yield from a portfolio, low trading fees and reasonable taxation. This is also assuming a relatively conservative portfolio (notice the beta is only 0.64).

Of course 6% real growth (or higher) can be achieved by taking on more risk, but the likelihood of beating the market consistently is low as few investors and investment managers routinely outperform the market over a 5 or 10 year period. Those who do outperform tend to charge a premium for their performance which increases the cost of investing reducing the return you would receive. This style of investing (DIY) with a large portfolio also lends itself to far more involvement (time) than Karin would possibly be interested in.

So what about investing with a professional such as a financial or investment advisor?

For the same $500,000 most investors are looking at a management fee of at least 2-3% before taxes or roughly the $15,000 that would be earned in dividends from the above portfolio. If you are fortunate to have your transaction costs included in that 2-3% great, but most professionals are far more active than a DIY investor (we are often buy & hold, adjust allocations only periodically) thus adding to costs that take away from returns.

I would guess that it would not be uncommon for most investors with $500,000 that is professionally managed to be paying over 3% annually in total fees, before tax and inflation. This does not take into account the higher exposure to tax from capital gains as dividends would likely not have as much of an emphasis in a professionally managed portfolio. Take note that even 3% over 10 years is potentially 30% of your return paid in fees to a professional.

So when is a professional worth the money?

That decision is entirely up to the investor, but if time is important, knowledge is lacking and you are willing to pay for performance then 3% per year might be worth it to you. If you are not achieving reasonable performance though, then you have the wrong professional and some hard decisions may need to be faced.

Do you take the reins yourself? Can invest with discipline? Are you confident you can handle your emotions during a volatile market?

I spend approximately 2-5 hours per week with my portfolio because I have the discipline, experience and drive to manage my own wealth. If someone doesn’t have that time, at a minimum, then a professional, fee-only advisor, may be something to consider.

If you do want to work towards investing on your own, then this is the right blog for you!

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