Q&A: "Should I Have My Investments Professionally Managed?"

Question and background:

Should I Have My Investments Professionally Managed?

I am 58, single, home paid for. I have $520,000 in my 401k. My plan only allows me to invest in a bunch of vanguard funds...sm cap..mid cap...target retirement...bond funds ...etc. I'm not too knowledgeable on the market and finances in general. When I retire at sixty I was considering moving this money to Ric Edelman's company and have them manage it. I believe that will cost me two percent a year. Do you think I'm better off paying a bit more for some professional management of funds? My main concern is keeping up with inflation. I also receive a fixed pension at sixty. Thank you.

Answer:

Whether you choose professional investment management can be distilled to three questions:

What's the likelihood that the professional manager will do better than you in up markets, by more than the fee you're paying?
What's the likelihood that the professional manager will do better than you in down markets, by more than the fee you're paying?
Is the fee you're paying worth it to you simply because you don't want the headache, or you have little interest or knowledge in this area, or you'd just rather be doing other things that you enjoy?

Your response to those three questions will be your answer.

Now, you mentioned paying a certain financial firm around 2% (annually) to manage the portfolio. That seems very steep to me but, of course, whether a fee is high or low depends on the total service package provided.

The financial industry is experiencing some fee compression. And if your manager simply provides a strategic asset allocation (think: static model portfolio) and nothing else, then you could probably find a basic service of that kind for around 0.50% per year, give or take.

If the manager is providing tactical asset allocation (think: dynamic allocation which attempts to "time the markets" to some extent), if they're good at it then they may well be worth 1.5% to 2.0% per year.

And of course, many advisers provide not only portfolio management but also broad-based financial planning, specialized reporting and access for you, proactively keep in touch with valuable ideas, etc. A fair fee in the current environment depends on what you need and want. Depending on your needs, you might find that kind of service for 1.0% to 1.25%, give or take.

Coming full circle...if you decide to hire a professional manager, I encourage you shop around a bit and do a few interviews. Make sure you're comfortable with the manager, their investment philosophy, and that they'll provide exactly what you're seeking. Feel free to contact me if you have additional questions.

All the best!