Using multiple investment professionals: A guide for consumers

By grub9tow

Can we do it alone? Should one person make all the investment decisions or is it too important for that? Maybe decorating the den or repairing a piece of furniture is OK for doing it yourself, but funding your retirement years — you know, that day when the paychecks stop coming — sounds critical to me. Think about it.

Research by Barber and Odean1 shows that more than 40 percent of investors are buying stock on their own through a discount broker. If they are depending on that for future income, then most of them will be disappointed. In fact, doesn’t buying stock through a broker’s recommendation sound risky? How about the 401(k) at your place of employment? Do you have to make all the investment decisions? Unless you’re a professional and that’s what you do eight hours a day, it sounds like another risky adventure.

So what’s the alternative? What do the high-net-worth do? I’ll tell you what they do. They use a multiple-investment-professional approach. Alright, let’s talk about doing this the right way.

First, let’s diagnose this whole situation. So, do we have ego-involvement to overcome here? Is our pride getting in the way of making good decisions? Men, ask your wife. Ladies, you’re on your own. How about this. When the market crashed and your account went south, maybe your broker said, “We’re in it for the long run.” But you said, ”I can do better myself.”

Can you really? OK, just how much is your pride worth? When you’re 90-years-old and you look back to this time, will you care whether you did it yourself or will getting that retirement paycheck be more important? Enough said.
Not convinced? Let’s look at the statistics. DALBAR2 shows that individuals investing on their own over the past 20 years have only averaged a 3.17 percent return on investment. Meanwhile, if they had just put their money in the S&P 500, they would have gotten a return of 8.2 percent. Meanwhile, a managed account recently made available to the average investor using multiple investment professionals for the past three years has averaged 19.27 percent. OK, that’s one of the top ones, but you get the point.

Mutual fund advisors typically make 10 percent to 12 percent. Even if you’re one of the top individuals trading with a discount broker, this multi-manager approach is hard to beat. Is it worth taking the risk of self-trading for your financial future?

So what is this multi-manager system? Typically, it’s made up of two layers: an overlay management firm and an investment management firm. The overlay manager takes the information about the investor, allocates the investment in a suitable way, re-balances periodically and puts together a number of investors, so that they get all the benefits of the very large accounts, including tax management and cash management. They are the conduit to the investment manager.

The investment manager buys and sells the investments in accordance with the guidance provided by the overlay manager and your investment advisor. He has floor brokers for stocks, bonds, options, futures, commodities and so on. Experienced professionals good at what they do. When the market turns against us, these guys know what to do, and they do it immediately.

I use what is called a unified managed account for the following reasons. First, it brings all of your assets together in a single account, even though it is well-diversified. That way, you get one statement where you can see exactly where you stand with all of your investments. You get added tax savings, and the investment team helps you manage that. You coordinate your investment plan so you know it’s suited to what you want to accomplish. You’re invested in multiple products, including separate managed accounts (SMAs), exchange traded funds (ETFs), stocks, bonds, etc. You get automatic re-balancing to maintain your intended asset allocation. There are quarterly checkups with you and with tax management. It looks like this will be the wave of the future.

So, here’s your homework. First, decide when you would like to retire and how many years of retirement income you will need. Then do a budget for those retirement years, including normal living expenses, travel plans and the things you want to do in retirement. Now, what monthly income will be required to pay for all this? Add it all up and there’s your savings goal. If you have that much saved up right now, you're set. All you have to do is save at a rate that beats inflation, historically 3 percent to 4 percent, and then stay on budget. Of course, a little overkill wouldn’t hurt.

1 Trading is Hazardous to Your Wealth, Barber and Odean, The Journal of Finance, April 2000