EVOLUTION OF INVESTMENT MANAGEMENT – PART I

Individuals are often confused by their many choices for an investment advisor. This report explains what is available (good and bad).

THE INVESTMENT PROFESSION

Investment management has improved as our financial system has evolved. Before the 1950s the investment profession did not exist. Today an array of advisors is available. They range from generic to highly individualized “concierge” services.

What A Good Advisor Should Do

About half of all advisors focus on buying and selling securities, usually with the implied promise that they will “beat the market.” Historical data show that a small percentage of advisors succeed. It is not wrong to seek advisor performance, and you may find a good one. But even if successful, managing a portfolio is but a small part of an advisor’s job. The benefit of great investment performance will melt away if it is not part of a plan that shelters wealth from the burden of taxes over one’s lifetime.

Equally important, accumulating financial wealth should not be a goal. Rather, your goal should be figuring out how your wealth can benefit others as well as yourself. In my work, I have seen wealth both bless and destroy lives. Some people strive to be “be the richest person in the graveyard.” A great country music singer wrote about the fallacy of this.

When you leave this earth for a better home someday, The only thing you’ll take is what you gave away.” Falling Leaves,  Grandpa Jones, 1964

A Wealth Advisor Should:

• Develop a plan tailored to your goals, risk tolerance, and financial situation.

• Manage a diversified portfolio for your objectives and risk profile.

• Allocate funds across asset classes to manage market volatility.

• Minimize taxes with tax-loss harvesting, retirement accounts, and estate planning.

• Make specific plans for your retirement.

• Help structure your estate to minimize taxes, transfer wealth to heirs and charities.

• Recommend insurance to address disability, long-term care, and premature death.

• Help with your family’s education costs with college savings plans.

• Meet regularly to review any financial life-changes.

• Tutor you on investment principles and markets.

• Be open to answer questions and give guidance.

• Help you stay disciplined and avoid impulsive decisions.

• Work with your tax advisors and attorneys to address your total financial life.

Know How Much You Are Paying:

Historically, excessive trading and advisor fees have eaten into investment returns. Fortunately, the industry has evolved, so that many of these costs have been reduced.

Lower trading commissions (almost zero) coupled with new tax efficient funds have improved “net returns” after fees and taxes. But you must be wary. The investment industry still wants to squeeze as much money from you as possible. Some use multiple layers of fees that are not apparent, so insist that an advisor explains ALL the fees you pay. Do your homework.

A satirical book in 1940, asked, “Where Are the Customers’ Yachts?” and joked, “Investment managers allocate the assets between themselves and their clients by taking all the money and throwing it in the air. “Everything that sticks to the ceiling belongs to the clients.”  Some advisors still work that way.[i] [ii]

[i] Zweig, Jason. "When Wall Street Rolls Out the Red Carpet for You, Who Pays?" The Wall Street Journal, March 8, 2024.

[ii] Saab, Geoff. "Low Risk Rules: All-you-can-eat pizza and ice cream. Why the low-correlation lie can wreak havoc on your diet." February 26, 2024.