There’s a debate going on at Quora (the question and answer site) about the cost of wealth managers:
What are the pros and cons of wealth managers vs passively investing in an index fund?
One of the issues is comparative fees:
– Index Funds typically charge 0.07% of funds under management.
– Wealth Managers typically charge 1.00% of assets under management.
So what do you get for the 14 times increase in fee?
Well, I wouldn’t know, because I wouldn’t go near a “wealth manager” with a barge pole …
… but, Scott Burns said it best:
40 years of investing has taught me that rented brains seldom help us build our nest eggs. Rented brains feel a deep spiritual need to build 20,000-square-foot log cabins in Jackson Hole with the return on our money.
It would be OK if that 14 times extra fee equated to extra returns, but the research shows that it really does only buy the wealth manager a good living – not us:
Eugene F. Fama and Kenneth R. French looked into this issue in their working paper titled, Luck versus Skill in the Cross Section of Mutual Fund Returns. Their study focused on U.S. equity mutual fund managers from 1984 to 2006. It’s no surprise that they found that in aggregate, actively-managed U.S. equity mutual funds performed below the market after costs. The big question they were trying answer was did the winning managers have skill or were they just lucky?
So, if you are prepared to read a few books and try a few things, then go ahead and try your own luck in the stock market … failing that, simply put your money into a low-cost index fund – a least, you’ll avoid the heavy management fees!