Broker Check

How We Select Money Managers

Several times per year we are asked if we manage assets (commonly referred to as fee-based or advisory accounts). We have long had the capability to do so and in recent years have incorporated a third-party, fee-based platform for our clients who prefer this approach. However, we feel it is important for our clients to understand the trade-offs in using this type of account. Instead of earning a one-time commission and an annual trail of 0.25%, we would earn 1% per year, every year, on the assets under management (AUM) with the fee-based approach. Nobody thinks to question this practice in an environment of double-digit returns. Perhaps clients accept sacrificing 1% on their investments when the markets are doing well. The fee-based approach does allow our third-party platform manager to use several different money-managers within the same account and incorporate some strategies that may not be available in a traditional mutual fund portfolio. 

The problem is that these costly management strategies of portfolio re-balancing, market timing, etc..., do not necessarily result in better long-term returns for our clients compared with the historical returns of the mutual fund portfolios we design. We have been and continue to be cautious about embracing these services and prefer to do business with publicly managed mutual funds that are not wrapped with another layer of management. We also prefer to not manage money ourselves. Rather, we seek out those managers who have done it longer and better than any other. Analysts are highly trained persons specializing in securities selection and research. We cannot easily compete with their expertise and trying to do so would result in having less time to assist clients with their financial planning goals. So, when considering an investment manager that is not a public mutual fund, ask the same questions we ask of organizations that try to induce us to use their money management services:

  1. How long has your organization been managing money? (The longer the better over different market and economic cycles).
  2. What have the returns (net of all costs and expenses) been on your best performing portfolio since inception and over the past 20, 15, 10, and 5 years?
  3. Are your financial statements audited by independent third party accounting firms?
  4. What index is most relevant for comparing and benchmarking your performance?
  5. What is the relevant background and experience for every person who manages your best-performing portfolio?
  6. What research services do you use to pick securities for your portfolio or do you make on-site research visits to companies you might decide to buy?
  7. What are all of the costs I pay for out of my investment portfolio and what do they pay for?

Remember, there is no free lunch. All investments have expenses, even the "free", no-load mutual funds. The investor should seek to understand what the expenses are, how they are paid, and determine whether they are getting what they pay for.

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