Insights & Advice


It is no longer enough to simply manage money

Back in the day, money managers were revered. News stories spotlighting the year’s “hottest hands,” or that hedge fund’s rising star were all the rage. Retail investors chased performance and paid for it. But times are changing, and simply beating the market for a year or two fails to impress most investors.

And with good reason.

Most of us are in the investment game for the long haul. We are saving for retirement: a process involving decades of saving and planning. Chasing the firm or advisor that “beat the market” this year has turned out to be a disastrous approach to that concept.

Most of us have now realized that you can’t beat the market. Sure, for a certain period of time-days, months, even a few years-you can, if you are lucky. Over time, however, your performance will revert to the mean, which in this case is the average returns of the market overall. So, paying a money manager a high fee year after year to provide outsized performance is a fool’s game.

On occasion, I meet some prospective clients, who still believe that’s possible. They have run from advisor to advisor with great hopes followed by disappointment, and then bitterness and blame. As a fiduciary, I am required to tell them the truth. For those who don’t believe it, I quickly show them the door.

Given the facts of financial life, why, therefore, should you pay a money manager yearly fees simply to give you what the market gives you? Why not save your money and buy an index fund and be done with it?

I think that is a rational approach for some of us, at least those who can weather the ups and downs of the markets without getting emotional (selling low and buying high). If you have the discipline to stick to a plan for many years without swerving, changing, or being influenced by outside events than you can manage your money as well as any manager. The problem is that few of us can do that. The rest of us need a coach and that’s what you are paying for, but even that is no longer enough.

But how much is that worth? If, over the next decade or two, investment advisors continue to charge large fees for simply providing market returns and “coaching,” I believe there will be far fewer of us around. The advent of artificial intelligence portfolios at substantially reduced fees is simply the first shot over the bow for an industry that hasn’t changed in the 40 years I have been in it.

In my opinion, investment advisors are at a critical juncture. While they beat their chest for providing an extra percentage point or two for their clients, they ignore an entire array of financial challenges that could prove fatal to their clients. I have been writing columns on many of these issues for years.

The rising cost of health-care poses a greater challenge going forward than any down draft in the stock market. Protecting your assets and passing them along to your children is equally (if not more important) than identifying the next internet darling in the stock market.

When and who should take their social security benefits, or having enough money to put your kids through college are concerns that are just as important as what the market did this year. Elder care planning, financial planning and advice on veteran’s benefits are some additional areas where more and more of us are going to need high-caliber expertise.

As market performance becomes the norm, and more and more investors focus on what really matters—a holistic approach to managing their wealth and welfare–who among the nation’s advisors can offer all of these services? Outside of our firm, I can’t think of any. And this is not an advertisement; it is a call to action for an industry that is stuck in their ways that they need to change or perish.

Posted in Portfolio Advice, The Retired Advisor