Do You Need a Money Manager to be a Successful Investor?

Would you pay a huge percentage of your hard earned cash to have a money manager invest it for you? That doesn’t sound like a very good deal, but that is exactly what some people do. If you decide to work with an investment adviser, you need to make sure you are getting the appropriate amount of value.

I’ll put the example above into simple terms. Let’s say I am a relatively conservative investor, and I have a mix of stocks and bonds in my portfolio. I am taking less risk so I am comfortable with a lower return. My money manager has chosen an actively managed mutual fund with a 1% fee. I also have to pay my money manager, and they also charge a 1% fee to manage my portfolio. What if the fund yields a 5% return over the long run? I would only yield 3% because of the fees I paid.

Money Manager

Fees Can Add Up Quickly

As you can see, fees add up quickly for investors. Doing some quick math, let’s see how that would affect your Roth IRA. We will use a 30 year time period for investing. In 2019, the limit for a Roth IRA is now $6,000 per year if you are under 50. For simplicity, we will use the $6,000 limit for the entire period.

Disclaimer – this is strictly hypothetical and is relatively simplified. I am assuming that I could receive a 5% return from an index fund constructed similarly to the mutual fund. All investments have different levels of management fees and you have to read the fine print. However, my point is to show you how important it is to maximize every percentage of return you can get!

Roth IRA Comparison

30 Year Period

$6,000 invested annually

5% return on my investment

Total is $424,565

That is a nice return on my money! I invested a total of $180,000 and through compound interest, I now have a total of $424,565. How different do the number look if I only get 3% return on my money?

30 Year Period

$6,000 invested annually

3% return on my investment

Total is $300,016

The difference in the return on my money is significant. I cost myself $124,549 just in fees! The question I have to ask myself – was it worth it?

The Case For a Good Money Manager

I will be the first to say that a good money manager deserves to be compensated. There are some excellent investment advisors who do a marvelous job for their clients. However, the majority of people may be better served by handling their investments on their own. This is particularly true for accounts like IRA’s, which anyone can easily establish by themselves.

There are a large group of people who are willing to pay a premium to have someone manage their money. There are a variety of reasons why people choose this route. One of the big reasons is that they have ZERO desire to manage their own investments. They may feel that they do not have the emotional makeup to deal with the ups and downs of the market. Others might find the process of choosing investments overwhelming and frustrating.

Are You Getting a Premium For Using a Money Manager?

One of the big problems many investors face is that they are paying someone a huge premium to invest in products that do not require a lot of work by the money manager. For example, if you are paying me 2% to manage your money, and I put you in a simple Index Fund where I do not have to do much work over the course of the 30 year period, you are not getting value for your investment. The example I used above is typical of the return from a relatively conservative low cost index fund with a blend of stocks and bonds.

Many index funds charge fees less than a quarter of one percent. If I manage my investments on my own as much as possible, I can greatly reduce the amount of fees I am paying. Most investors are penalized by two major factors: excess fees and poorly-timed trades. You can avoid both of those with some research and discipline.

Three Different Types of Investors

When I was a full-time personal trainer, I worked with three groups of people in the gym. The first group found working with a personal trainer essential to their success. They were knowledgeable, but liked the accountability, direction, and simplicity of training with me. They were willing to pay a premium because they found it beneficial to their health and wellness.

The second group of people wanted to work with me for a limited time. They were motivated to work out, but just needed instruction and direction on how to get started. These people would train with me for a few weeks. I taught them proper form on the exercises, how to set up an effective workout plan, and helped them set up clear goals. Once that was accomplished, they were happy to manage their own fitness program.

The third group of people were those who would never seek out the advice of a trainer. They were those who were comfortable working out on their own, and did not have a need to seek out my direction. I used to see people in that situation get very mixed results, but that was their prerogative. It was certainly not my job to critique those folks, only to be there for them if they ever wanted my advice.

Clearly Identify What Works Best For You

My hope for you is to clearly identify which group you fit into and find what works best. My business is constructed to teach people sound investment principles and understand the essentials. I consider my business model to be built around the “teach a man to fish” philosophy. Good investing does not have to be complicated! If I pay someone a premium to manage my money, I better receive outstanding results in return.

Many people work with an investment manager in order to “beat” the market. The unfortunate thing is that it is extremely difficult to consistently outperform the stock market. Even with mutual funds, only an estimated 15% – 25% of them “beat” the market annually. This doesn’t mean they always beat the market, they just did it for one year!

Historical Data Is Important to Consider

Let’s use a 45 year time period as an example. From 1970 to 2015, the S&P 500 averaged a 9.25% return. While most mutual funds do not yield that rate of return, let’s assume that I was in a mutual fund that beat that number. My mutual fund yielded a 10.25 return. My mutual fund has total fees of 1.25% over that time period. My money manager also charges me 1% to manage my portfolio.

We are going to assume that I invested in the S&P 500 in a simple low-cost index fund. My total fees for the index fund are .25%.

45 Year Performance

$6,000 invested annually

9.25% return on the S&P 500 Index

Minus my .25% management fees

Total Compounded Return is 9%

Total Return – $3,445,116

Those are big numbers. However, I want to use a long investment period to show you how much even 1% can affect the performance of your portfolio over the long haul. Let’s look at my hypothetical mutual fund and calculate the numbers.

45 Year Performance

$6,000 invested annually

10.25% return on the mutual fund

Minus 1.25% for mutual fund fees

Minus 1% for money manager fees

Total Compounded Return is 8%

Total Return – $2,510,556

Remember – You Have to Consider All of the Fees Involved

In this example, the mutual fund technically “beat” the market if I use the S&P 500 as a guide. However, after I pay out all of my fees, I do not reap the full reward. I actually receive LESS than if I would have just invested the money myself in a low cost index fund and did no trading, except to buy my $6,000 worth of shares per year. I cost myself $934,560 over the course of 45 years. Was it worth it?

Once again, this is a very simple example. I just want to continue to stress the importance of maximizing your return and getting the most value for your money. I certainly would be happy with an estimated $2.5 million dollar return from my managed fund. But, I have compelling data to show that there are low cost investments out there that consistently meet the market and have the potential to offer me a better return on my money. If I combine a long time frame with an improved rate of return on my money, I see a massive impact on my bottom line.

Not All Money Managers are Created Equal

Remember, you have to understand exactly what is in your portfolio. You should know exactly what fees you are paying and what return you are getting on your money. It is not difficult to get started. If you want to take greater control of your money, check out my Build Financial Muscle Boot Camp! I cover all of the important topics you need to successfully manage your money. Even if you are a person that ultimately decides you want professional assistance, know that not all money managers are created equally. If you are not getting a premium for the fees you are paying, you need to shop around.

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