In case you hadn’t noticed the world is bifurcating. Whether it’s income distribution or fashion, it’s an upstairs/downstairs situation. The middle is going, going, gone. It’s Balenciaga or bust. (As an aside, isn’t Agnelli’s Balenciaga satin opera coat to-die-for?)
In fashion, if you want cheap-and-cheerful—COS, H&M, Zara, Topshop, UNIQLO—are happy to provide you with glad rags: trendy clothes in fair-to-middling quality. Just don’t expect any personal service and wardrobe consultation. It’s every shopper for herself and good luck snagging a change-room.
On the other hand, if circumstances permit, there are the luxurious ministrations of Prada, Gucci, Chanel, Dolce& Gabbana, Dior etc. Serene environments and personal attention, complete with a glass of Champagne.
The middle way, highly touted by Buddhists, is on the way out fashion-wise. Sears is toast but Wal-Mart is booming.
On the finance front, things are diverging too. Garden variety brokers—the kind that would call you with an investing idea or suggest when to take profits— are on the way out. These old-school types hand-built a unique portfolio made up of individual securities. Transactional accounts like these were a boon for buy-and-hold blue-chip investors. You paid once when you bought and once when you sold, even if the timing of those two events was decades apart.
Now banks and other financial institutions are converting clients to the “wealth-management” model. In exchange for managing a client’s portfolio, the advisor receives an annual fee. This fee ranges anywhere from one-percent of assets-under-management to several hundred basis points. The more money you have to invest, the lower your management fees.
Plunk down a minimum of $2 or 3-million and charges come in around 150-basis points or less. That’s considerably better than the typical management expense ratios on mutual funds that average 250-basis points and up. Of course, whether your advisor trades a little or a lot on your behalf, the charges stand, yea- after-year.
For those who don’t meet investment minimums, there are low-cost alternatives including ETFs, index funds and robo-advisors. With fees in the low single-digits, these are the Zara’s of the investing world. For a modest fee you participate in the capitalist zeitgeist—and benefit, or suffer, based the aggregate performance of a basket of businesses. These off-the-rack offerings are strictly for ‘downstairs’ types. Or are they?
A recent study has shown that clients with investment advisors average 1.8-percent better than DIY-types. Yet these returns are gobbled up by higher fees. So it appears that, for the average investor working with an average advisor, there is no advantage to paying for advice!
There are a 3-ways around this. One, you can find a manager who charges less than 180-basis points. This way you get to keep at least some excess gains in your pocket. Two, you can do your own investing with a low-cost online brokerage. Or, three, you can blend the two approaches.
Moral of the story: We may aspire to bespoke but off-the-rack seems to work out just fine.