If you were to look at all the costs and fees it takes to run your investments, you would cry. From transaction, custody, reporting and administration costs to banking, management, advisory and performance fees, it is just all a bit much. And those are just the direct costs. There are many more indirect, hidden or implied fees and I would estimate that it costs more than 5% to run an effective investment strategy. And before you say, well with my robo-advisor at Nutmeg I only pay 0.50%, remember the old adage: you get what you pay for.
Here is the thing, a stock and bond portfolio that I can run from my home these days is just that: a hobby. And yes, you can do that for next to nothing these days. I can also go to the park and pay £8.50 to play tennis for an hour, but that doesn’t make me a professional tennis player. To be a professional investor, you need to know your way around capital markets. You need to use margin, leverage and scale to operate on the efficient frontier. You will invest in hedge funds, trade commodities, and be able to transact in the private markets (debt and equity). All of these things require expertise, technology and an efficient business infrastructure, none of which comes cheap.
But ignorance is bliss and all we really care about is our net return. If someone delivers investment returns of 70%, I am very happy to pay them 20% in fees. If someone produces 1% and I am paying more than 2% in management and performance fees, I move on. And that’s the thing about this industry, everything is relative, everything has a price, and no one does you any favours. So how can we make sure that we don’t overpay for the things we do?
It’s as simple as one, two, three (sorry couldn’t resist the nursery rhyme). First, you need to figure out what you want and by that I mean, how actively do you want to get involved? If speculating, trading or picking stocks is your thing then go for it and find a good (cheap) on-line broker platform (like IG Index) and start trading away. The costs are low, you can trade any market and the whole thing is pretty efficient.
Two, you can go to a wealth manager. There are many different choices from family offices, to private banks and asset managers. The key is adapting the services to your needs. In other words, if you don’t need a daily phone-call, lombard lending, or mortgage services you can choose a more appropriate (cheaper) provider. Finally, get a second opinion. Most of us don’t understand half of the things that the average investment professional will throw our way. Which is why you need someone with expertise that you can trust and who can discern whether you are making the right choice. All else is random anyway. Simples, as the Meerkat would say.