In 2013, Were You Better Off Hiring Someone to Manage Your Money for You?

We forget about the sharks in the water.

“History repeats itself, first as tragedy, second as farce.”
–Karl Marx

Look up the phrase “this time it’s different” on Google, and you can find a panoply of situations where the headline writer has pounded his keyboard, imprecating that the situation about which he writes is truly different.

Just in the first two pages of results, I found the following situations:

  • Syria as different from Iraq or Afghanistan
  • The debt ceiling
  • Dow 20,000
  • NASDAQ 4,000
  • European elections
  • Immigration
  • Sales taxes

Sometimes, there truly is a seismic shift in the circumstances surrounding the situation about which the prognosticators utter their claims.

But, rarely is that the case.

A few months back, I had a random investment advisor decide to call me out of the blue on a Friday afternoon to tell me that his system of managing money was better than everyone else’s and that I shouldn’t advise people not to pay assets under management fees.

“My system is different” isn’t much different than “this time is different.”

And, so, the question hangs in the air for people who are concerned about the performance of their portfolios…

In 2013, Were You Better Off Hiring Someone to Manage Your Money for You?

In “Just What Does That Money Management Fee Cost You”, I evaluated the crippling effect that an assets under management (AUM) fee has on your portfolio over time while assuming that those money managers performed just as well as an index fund.

Boy, was that assumption wrong.

According to a recent study of 1 million investors by SigFig, in 2013, people who invested for themselves earned 17.1%.

Those who handed their money over to an “investment advisor?”

14.1% return.

Yes, people who paid assets under management fees underperformed by 17.5%, and that’s before paying a 1-2% assets under management fee!

By the way, just to compare, a 73% VFINX/27% VBMFX (to reflect the median age in the U.S.) portfolio would have had a 22.88% return. Not that I’m making any recommendations, since I’m not, but it also goes to show that we think far too highly of our own investing skills. It’s just that “investment advisors” who charge you 1-2% of your total investable assets think even more highly, unjustifiably so, according to the statistics, of their own skills.

I wanted to see just how much this underperformance would cost someone. I extrapolated (I know, dangerous, but probably reasonable) advisor underperformance to see how someone who, earning a median salary at age 25 would be hurt by the reduction in returns. I assumed that this person saved 16.62%, or SAFEMIN, and his earnings increased or decreased with inflation. I simulated stock market and U.S. Treasury returns, and at age 66, assumed that this person took Social Security, which covered half of his expenses. Expenses continued to increase by inflation after age 66, when the person retired.

How did having an advisor affect the probability of running out of money at age 95?

I conducted 10,000 simulations, and the results were stark.

First, let’s look at the person who managed his own money.

He still had money at the end of his life (assuming he lived 95 years) 91.25% of the time. His median net worth was $11.9 million dollars.

If he had handed his money over to an advisor who had the average underperformance and then charged 1% of assets under management, he had money at the end of his life only 32.93% of the time, and his median net worth was $-1.39 million – a nonsensical number, since that assumes he’d just borrow and borrow to fund living, which would never happen.

Put another way, the advisor cost this person over $13.8 million dollars in net worth more than half of the time.

So, is paying someone to underperform the market worth that much? Is it worth it to not think just a little (say, once a year) about your investments? Would you want to take a chance that you’d run out of money 58.3% of the time so that someone else can “manage your money” for you?

Sure, these are simulations. Chances are that the future won’t look like any of these. But, it’s illustrative of what could happen if your advisor invests for you and underperforms like the average advisor did in 2013.

But this time, it’s REALLY different!

Maybe, but the numbers and history are against you.

Harvard’s Kenneth Rogoff and the University of Maryland’s Carmen Reinhart surveyed over 800 years’ worth of economic data and came to the same historical conclusion.

Each time, we saw a situation that had historically been repeated.

Each time, we thought “this time, it’s different.”

We acted like it was different.

It wasn’t different.

Even supposed stock market “gurus,” the crème de la crème (which your advisor probably isn’t), are wrong in their picks 52.6% of the time.

If the best out there continue to fire up stinkers, why would people without the insight, skill, knowledge, and information that these “gurus” have do any better?

Chances are pretty good that they won’t.

And, in this case, it’ll prove that this time isn’t different.

Are you willing to take the AUM gamble? Let’s talk about it in the comments below!

Published by

Jason Hull, CFP®, was the co-founder of Broadtree Partners, a firm that acquires $1-5MM EBITDA companies. He also was the co-founder of open source search consultancy OpenSource Connections, a premier Solr and ElasticSearch firm. He and his wife FIREd (financial independence retire early) at 46 and 45, respectively. He has a BS from the United States Military Academy at West Point and a MBA from the University of Virginia Darden Graduate School of Business. You can read more about him in the About Page. If you live in Johnson County, Texas or the surrounding areas, he and his wife are cash buyers of Johnson County, Texas houses.

One thought on “In 2013, Were You Better Off Hiring Someone to Manage Your Money for You?

  1. There are a lot of different things to consider in this debate. It looks like we are inclined to say each time things are different, but the future really does tend to look like the past. Thanks for the interesting post!

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