George D. Marron, BridgeTower Media Newswires
Let’s say that you are planning the Great American Summer Vacation — a cross country trip with your family. You are renting an RV for two weeks.
There are two left on the lot. There’s a 3-year-old model — it passed inspection, tires look OK, and it has some dings and scratches. You’ve been told, “It’ll get the job done.” Next to it is this year’s model, gleaming in the sun, all the creature comforts, satellite TV, WiFi — the works.
The new model costs more. You can afford both. Which one do you bring home to your family to start your once-in-a-lifetime trip? Which one is less likely to break down in the middle of Route 66? Which one will provide you with more value?
You have to ask the same questions when evaluating investment management options. In the last few years, management cost has become a central focus. Undoubtedly, cost is important. However, it is relevant only with respect to value. Warren Buffett famously said, “Price is what you pay, value is what you get.” With a focus on value, here are some guideposts for reviewing your investment manager.
Relationship: Do you have a meaningful relationship with your adviser?
If the answer is “I don’t have an adviser,” that may cost you in the long run. Studies have shown that individual investors underperform the mutual funds that they are invested in due to behavioral finance mistakes (e.g., buy high and sell low) (Dalbar — Quantitative Analysis of Investor Behavior; Morningstar — Mind the Gap.) It can be difficult to stay disciplined and on track when you are going it alone.
Even if you do have an adviser, how is your relationship? Do you trust the adviser to have your best interests in mind? Does the adviser take a genuine interest in your life, hopes and concerns? This is an issue that goes beyond performance. You don’t want to suffer a flat tire in your relationship when you need to make critical decisions.
Planning and Advice: Beyond relationship, does your adviser add value through planning and advice?
If you are a Do-It-Yourselfer, you may have limited access to personal, professional and live investment advice. If you have hired an adviser that you like, are you receiving advice that is actionable and truly helps you manage your life?
Your investment and personal financial plan should tie in to the following conversations with your adviser:
• Risk Assessment & Management
• Current Spending & Saving Plan
• Retirement Plan
• Tax Planning
• Social Security & Medicare
• Estate Plan (especially to be sure that the ownership of your assets and beneficiary designations are coordinated with your estate plan).
Life is dynamic. You should have these conversations with your adviser and regularly review your investments in context. A solid planning relationship could be the difference between “It’ll get you there” and actually enjoying the ride.
Net of Fee Investment Performance over a Market Cycle: Last, but not least, you must consider net of fee performance over meaningful time periods. Net of fee performance is the ultimate arbiter of value.
While 1-3-5 year performance certainly impacts your plan and sense of well-being, we believe the true test of an investment manager is net of fee performance over full market cycles, which could be as long as 10+ years. It is critical to understand your adviser’s track record in up and down markets. Managing volatility and risk in down markets may be a significant contributor to long-term performance and a difference-maker in your retirement. It’s like comparing the RV with serviceable brakes vs. new brakes.
You should ask the following questions:
• How do you protect my portfolio?
• How volatile is the portfolio?
• What was the performance during significant drawdowns (2000-01 and 2008-09)?
• How do you differentiate your investment management strategies from other managers?
When you review an investment manager, you want to be sure that you are receiving value for the cost not just the lowest cost. A solid relationship, actionable advice and net of fee performance are critical factors of value that will make all the difference in your journey.
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George D. Marron, JD, CFP® is vice president for Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, businesses, non-profits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534 (585-586-4680).
