Author Topic: True Cost of an Investment Manager?  (Read 1332 times)

EngineerYogi

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True Cost of an Investment Manager?
« on: June 23, 2018, 09:51:53 AM »
Does anyone have a resource for calculating the actual cost of an Investment manager? A spreadsheet would be great or tips for creating my own?

DH and I invest in low cost index funds, (401k with fidelity, IRAs with Vanguard and a TSP) and averaged 13% returns in the last 5 years.

DH has a coworker who is using an investment manager that charges 1.5% plus $350 per year but is averaging an 18.5% return in 5 years. The coworker did not know what a fiduciary was when he asked him and isn't aware of the expense ratio of his portfolio.

I think it's safe to assume that over the course of 20 years his average returns will be closer to ours, I just wanted to show him the impact of the fees he's paying.

I used the "T-Rex Score" but that is only based on an initial investment not an annual one which I think would have an even more significant impact.

MustacheAndaHalf

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Re: True Cost of an Investment Manager?
« Reply #1 on: June 24, 2018, 04:40:41 AM »
If you consider an active manager to be similar to an actively managed fund (without the track record), you could use SPIVA data that shows the S&P 500 return vs large cap funds.
https://us.spindices.com/documents/spiva/spiva-us-year-end-2017.pdf

radram

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Re: True Cost of an Investment Manager?
« Reply #2 on: June 24, 2018, 08:45:23 AM »
Don't forget it does very little good to compare apples with oranges. Everyone that beats the market took more risk. But so did many where the risk did not pay off.

Your co-worker beat your performance through 5 years. So what. So did everyone that speculated on bitcoins and stayed in for 5 years.

What was your coworker invested in? I bet they can not tell you. If he can, then you can show him how an index fund in that market would most likely be less.

The Guru

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Re: True Cost of an Investment Manager?
« Reply #3 on: June 26, 2018, 05:52:34 AM »
Unless you and CW's asset allocations are identical, there's no way to compare

Judging by CW's returns i'd suspect he's fairly heavy in equities. Your best bet mmight be to remind him that such a portfolio is going to have a negative year eventually- and when that happens, he's still going to pay $350 and 1.5% despite the fact that he lost money.

To which he'll likely reply, "yeah, but I would have lost more without my Guy!". Because there are some who can't comprehend investing without A (financial) Guy to hold their hand. I'm on a board at my church w/ 4 other guys, managing a fair sized foundation. At least 3 of the 4 have their personal investments with a FA. Great guys, but neither evidence of the advantages of index investing nor pointing out the head-scratching decisions of our FA will sway them. It's just not The Way We Always Did Things.

Too, some people become attached to the FA's themselves. One of the aforementioned gentlemen has mentioned having dinner w/ his Guy. A year ago, I was at the funeral of my cousin''s husband. At the luncheon afterwards a gentleman came by our table, expressed his condolences to my cousin and and he'd be in touch at some point. Someone else explained that he handled her finances and those of other  family members. On the one hand, it seemed a nice touch; and I can see how it would be natural and even necessary to become familiar with a client in order to understand their financial needs. OTOH it's a shrewd move on the part of the FA; it's way harder to dismiss someone who's become like part of the family.

Conclusion: don't expend too much time in what's likely to be a losing cause. Take satisfaction in the conviction that your strategy is the correct one.

Retire-Canada

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Re: True Cost of an Investment Manager?
« Reply #4 on: June 26, 2018, 08:32:15 AM »
Does anyone have a resource for calculating the actual cost of an Investment manager? A spreadsheet would be great or tips for creating my own?

Just use a compound interest calculator: http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Scenario 1

- starting from $0
- add $20K/yr for 20yrs
- at 9%
- results in ~$1.121M

Scenario 2

- starting from $0
- add $20K/yr for 20yrs
- at 7.5%
- results in ~$929K

Cost of 1.5% fee differential is $1121K - $929K = $192K.

As others have pointed out this type of comparison is only meaningful if you hold the same investments, but are being charged different fees.

Retire-Canada

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Re: True Cost of an Investment Manager?
« Reply #5 on: June 26, 2018, 08:36:53 AM »
You could also use cFIREsim and adjust the "Fees" variable for a more complex analysis: http://www.cfiresim.com/

Leaving everything default for a 30yr FIRE at 0.1% fees I get a ~97% success rate and ~$2.1M avg ending portfolio. For 1.75% +0.1% = 1.76% fees the success rate is only 75% and ~$885K avg ending portfolio.