A good friend wrote me asking my advice on whether the proposal submitted to him from a Robo Advisor seemed to make sense and whether I would recommend doing it. As I get wealth management questions all the time, I thought some people might find it valuable to see my reply and how I frame thinking about “professional relationships around wealth management.”
<my anonymous good friend>,
Great to hear from you and thanks for reaching out. Personal Capital is actually one of many in the now famed “Robo-Advisor space.” A couple others (even though you’ve probably already looked into these) are:
There are actually several more… but that’s off of the top of my head.
Here are a couple of thoughts:
Here’s a way to think about 0.89% as a management fee: (1 + 0.89%)^(number of years invested) – 1 = total amount you paid them in percentage terms.
So if you use them for 10 years: (1 + 0.89%)^10 = 9.3% (cumulative, not annualized). The challenge with paying people to manage your money is that it’s difficult to compound your money in excess of market returns when you pay around 1% of your assets (rain or shine). Take for instance the “improvement of their tactical model over capitalization weighting,” it’s 1.3% annualized excess return … but you’re paying 0.89% in management fees, so if you got at least the value that occurred historically (according to them and assuming this is a repeatable phenomenon which almost never occurs in the world of finance), it’s still nearly a wash for you because you ended up paying them most (0.89%/1.3% = 64%) of your alpha in fees.
ETFs have essentially provided ordinary investors with the ability to completely manage their own investments in turn-key ways, that cost little to nothing. For instance, let’s say you ascribe to their “equal weighting strategy” (I would argue that they mislabeled their strategy as “tactical”, tactical generally refers to changing the allocation weight over given time periods, and they’re essentially keeping it the same), you could just get your hands on the Guggenheim S&P Equal Weight ETF, or build it yourself with capitalization & sector ETFs. But beware the the tea leaves of equal weight as there are times when consistent out performance hasn’t been the case.
Lack of Reporting
Whether you’re using Personal Capital, Wealth Front, or a financial advisor for Morgan Stanley, you’ll find one common dilemma — Not one of them provides you performance reports that let you visually understand whether or not they have provided adequate value for the management fees they charge (and that’s exactly the issue I’m going after with Viziphi). So from that perspective, just be aware that although they show you “how much incremental value their equal weighting, tax efficient, strategy would have provided in the past,” you will (likely) not get to see that information in the same layperson visual terms once you’ve given them your money. In other words, you will be challenged to determine whether they have “earned the fees you are charged” for the duration of your relationship with them — and that’s just the way the industry is (as a side note, I have found this not be intentionally misleading but rather is the fault of us as investors, but that’s a diatribe for another time).
What You Really Should be Asking Yourself
In the end, there’s really only one question you should be asking yourself (in my opinion):
Does the ease of having someone manage your money for you justify no over performance to some viable investment alternative (like the iShares Moderate Allocation ETF) or even slight under performaning over the long run?
Because that’s really the way you need to frame this relationship. You are getting the value that a professional (or computer) is going to “look after your money for you,” which means you don’t need to spend hundreds of hours looking at ETF expense ratio’s, bid-ask spreads, momentum indicators, entropy scores, or anything else… you can literally, just set it and forget it.
There is a value to having someone else handle your investments and unfortunately, the financial services industry doesn’t adequately communicate how valuable it is to have someone do that at your behest; so I’d go into this eyes wide open regarding consistent out performance or any of the other mislabeled value propositions they shit into their deck, that’s not what you’re paying for and that’s not what you should expect. If you’re trying to “beat the market” then make $1BB and invest in the same exclusive funds that David Swensen does (he’s the CIO of the Yale Endowment), because neither you nor anyone else with a measley $1MM account is getting access to the best and brightest minds that are actually going to generate repeatable risk adjusted excess returns. If you let someone manage your money for you, that’s the value, someone is managing it for you. If they can perform similar to an investable index, then you should consider that a win, and that’s how you should go into the relationship.
Let me know if you have any questions or what i can do to clarify things,