Should You Pay to Have Your Money Managed?
With new tumult in the stock and bond markets, some investors may be wondering whether they could benefit from hiring a professional money manager.
For some people, professional money management is well worth the price. It saves them time and energy and allows them to sleep nights knowing that a seasoned and trustworthy pro is negotiating a seemingly treacherous market.
For others, paying for investment management is a costly mistake, says Martin Gruber, chairman of the finance department at the Stern School of Business in New York. If you are willing and able to invest sagely on your own, you’re better off saving the investment management fees, he says.
Where do you fit in? To find out, take this quiz, developed with the help of Gruber and Heidi Steiger, a partner at Neuberger & Berman, a New York-based investment management firm.
1. Does your portfolio lack a clear investment strategy for dividing assets among stocks, bonds and cash?
---------------- Yes -------------- No
2. Are your investment results consistently lower than market averages? In other words, if you invest in stocks, do the returns in your portfolio consistently lag the returns of the Dow Jones industrial average or the Standard & Poor’s 500?
---------------- Yes -------------- No
3. Are you distracted by worries about stock and bond market fluctuations or changes in interest rates?
---------------- Yes -------------- No
4. Are you worried that a lack of investment experience is jeopardizing your ability to save enough for major financial goals, such as retirement or paying college tuition costs for your children?
---------------- Yes -------------- No
5. Would having somebody else make these investment decisions cause you to worry less about your investments?
---------------- Yes -------------- No
6. Do you feel comfortable with the idea of someone else making the day-to-day buy and sell decisions for your portfolio?
---------------- Yes -------------- No
7. Have you had assets successfully managed by professionals in the past--through mutual funds, bank trust departments, pension funds or professional money managers?
---------------- Yes -------------- No
8. Does your portfolio’s performance suffer because you can’t spend enough time educating yourself or managing your investments?
---------------- Yes -------------- No
9. Do you have a clear understanding of why you own the investments you already have? And do you have rational expectations of what these investments can do for you?
---------------- Yes -------------- No
10. Does the time you spend managing your money prevent you from earning more in your occupation?
---------------- Yes -------------- No
If you have answered yes to at least six of these questions, seriously consider turning your investments over to a professional. Realize, however, that there are several ways to do this. The method you choose should depend on how much you have to invest, your investment savvy and how much faith you have in your financial adviser.
Generally speaking, if you have less than $100,000 in stocks, bonds and cash, your best option is mutual funds. This way you get diversification and professional money management at relatively little cost--you could pay as little as 1% of your account value each year in management fees.
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If you have between $100,000 and $250,000, consider a “wrap” account. Generally offered by brokerage firms, these allow you to select a personal money manager who buys a portfolio of stocks and bonds for you. Your broker helps you monitor the money manager’s performance. If your circumstances change or the manager’s performance isn’t up to snuff, the broker will recommend a switch to a new money manager. Wrap account management fees typically range from 2.5% to 3% annually.
Those who have more than $250,000 to invest can use a professional money manager directly. Money managers have the legal, discretionary authority to buy and sell securities on your behalf as long as they follow prearranged guidelines. The advantage to choosing the money manager over the similar wrap account is simple: It’s cheaper. Generally speaking, money management fees range from 1% to 2% of your annual account value.
If you choose to hand your investments over to a professional, choose the professional carefully. The only thing worse than losing sleep over your investments is losing your money to a financial con artist or an unskilled adviser.
