Fees

In coming to terms with some of the practical aspects of portfolio management, it is important to be prepared to consider some of the important realities of the investment business and ask some of the tough questions related to investing.

Simply put, it can be presumed that it is a requirement by a seeker of investment services that the investment manager whom you entrust with your money, produce a return better than a return on a passive index. If as a client you can buy a low fee passive index fund and perform better than 80% or more of the investment managers out there. It would indeed not make much sense to seek investment management services in the first place; since you have the option to do better than most professionals out-there over the long-term by yourself through an index. Therefore, the presence of evidence and a clearly defined strategy of how an investment manager is going to, and has, done better than a passive investment like the S&P 500 index fund is critical. But unfortunately, money management by and large is an industry where portfolio managers vastly under perform that index.

Most people that manage money generally charge a quarterly or annual fee based on the percentage of all your money initially invested plus the returns, if any. Also known as, management fee based on your assets under management (AUM). Charging such fees may be convenient, but paying such fees will dilute the quality of your returns, making it virtually impossible to do better than a passive index over the long-term.

We generally do not invest in ETFs, or a diversified portfolio of numerous stocks, or options. But rather focus on selecting and analyzing a small group of equities or stocks that we feel present the opportunity for meaningful returns, which simply can’t be matched or safely achieved by other investing methods. In this business, the true opportunities are indeed scarce.

Basing financial planning on a diversified portfolio of 60 or 70 or hundreds of different so-called “diversified” stocks does not consider the realities of producing worthwhile investment returns, in the stock market. The fact is, to an investment manager the number of stocks available, at any given time, that can produce the returns needed to realize and exceed your financial goals, are not many. Simply put, there aren’t that many businesses or stocks out there that have the potential to appreciate to a point at which they make truly exceptional investments.

There are also certain realities of the stock market, that must be considered; and these facts have not changed in the past hundred years or more. Accordingly, there are certain patterns of behaviour presented by “Mr. Market” that have repeated themselves almost cyclically in the markets. Knowing what such facts are and have them be communicated in a clear and common-sense way; is what may be expected of an ideal financial or investment advisor. Such knowledge will be critical to picking good stocks and make a material difference to returns produced by your investment manager.