this is the undeniable factThere is a difference between "significant" and "some". I have never denied that there are "some" investors that can do it on their own. The real question is whether it's the exception to the rule. Given the lack of data, BOTH our positions are full of holes because much like I can't prove whether amateurs can beat pros, you can't prove that that as a rule, they can.
I've never understood this position. Brokerage houses don't deny their end goal is to make money. I'm not sure anyone is under a different impression. My point is that all of them are a) facing downward pressure on fees (this is a fact) and b) the trend has been to focus on growing assets as a means to increase revenue given that it has become near impossible to charge more. Like I said above, to grow assets you either need to have great performance or great salesmanship. Or both.
If you only knew how much less information amateurs have compared to pros. It's not even close. This is one disadvantage amateurs have never and will never overcome. Do they have more information than before? Sure. But I don't know a single amateur that has a professional trading terminal for example. Or access to new issues. Or structured products. Or tax and estate planning (without paying for it which defeats the purpose of doing it on your own to save on fees.)
Well I respectfully disagree. I think the effort needed to find a good advisor is much less than what is needed to find, analyze, buy, build, monitor, sell, replace a number of potential securities on an ongoing basis.
The same risks in finding an advisor are there when looking for good companies to invest in. Unless you decide to be a passive investor. Then we're not talking about beating the markets at all.
Doesn't really support your point does it?
Unfortunately due lack of data in general, the reality is BOTH our positions are opinion. Neither one of us have hard data to back up our positions. Your evidence is just as anecdotal.
The only thing left to rely on is simple logic. And to me logic tells us that in general, professionals are better at their activities than amateurs. I can't think of a single activity or endeavor where this rule does not hold true. So in my opinion, to sway the argument in your favour, your position would need substantial evidence to overcome the prudence of this general rule. Yet there barely is any.
Of course it's prudent. Prudence is "good judgement that allows someone to avoid danger or risks". How can an amateur make a case that it is more prudent (less risky) to set aside all the experience, resources and tools in the hands of a good professional in favour of DIY? The world is littered with poorly built basements for exactly this reason.
Given that the easiest route for an advisor to build his wealth IS to build his client's wealth, again I have to disagree.
If an advisor earns 1% annually in commissions and fees from his book of clients, would he make more or less money by converting that $1million account into $2million or by doing a poor job and lose money but charge more?
To me it's illogical to argue that the advisor making money is somehow counterbeneficial to the client unless you can first prove that the client can do it better on their own. Otherwise it does not make sense to chastise them for it. Every service on the planet costs money. This discussion board is proof. Would I prefer a beautiful woman jerk me off or should I do it myself? One of those options is less expensive than the other, does it make it better? Does a doctor provide medical care for free? Since they don't, do we question whether their medical care is worthwhile just because they charge for it?
You have made a common mistake in making the assumption that performance numbers for managers do not already account for management fees. They do. Instead of hypotheticals, how about a real world example?
Let's use one of the most widely used mutual funds in the market. I'm not even using some obscure fund nobody has ever heard of. This find is well known and widely used. It is one of the largest funds on the street:
http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=F0CAN05MUH®ion=CAN&culture=en-CA
This fund smokes the index. Clients don't even have to worry about fees but regardless these performance results already accounts for management fees so this is net to client.
With all due respect, your hypothetical example just got smoked by a real life example. Bringing this back to our original discussion, do you really think the average amateur is going to have a 10 year number like Mawer? Again, I'm referring to the rule, not the exception, but even if we were dealing with the exception, have you actually seen someone do it or are you simply defending the concept without any real life example? Most people are not the exception and they fall under the general rule so the prudent choice for them would be to be in this fund rather than try to achieve these results themselves, or beat them. If they could beat them, I'd suggest they apply to become a portfolio manager in their own right and make way more money!
For the record, finding this fund didn't take much effort. Even with an average advisor, any client with this portfolio is already way ahead. Now couple this performance with a good advisor that has all the financial planning resources of a competent firm behind him and I question the need for someone to do it themselves, even if they could. Which I still question whether they can. Between selecting securities, defining sector allocations, setting tactical allocations, rebalancing, overlaying tax considerations (ie. Tax/loss selling, dividend income considerations etc) and then actually executing, I have rarely come across amateurs who come even close to implementing a well built portfolio let alone do it well for 10+ years.
Beyond that, 99% of advisors out there are now also coordinating investment management services with financial planning. So inaddition to that, you get budgeting, tax and estate planning, insurance planning, credit services and in cases like mine, access to private banking. None of which is available to the DIYer. All of which is included in the management fee being paid.
Missing out on so much without any guarantee of greater returns (in fact the opposite is more likely) and on top of that all that time and effort spent? Do these people not have jobs or social lives that they want to spend their free time basically learning a second job when the service is already there available at a reasonable cost? In many cases well below 1%? I don't know about you, but if I have $1million, I don't mind spending under 10Gs to have someone do all of this for me AND probably do better than I can.
P.S. We've been focusing only on a Canadian portfolio. This discussion leans even further away from you when you add the complexity of a more diverse portfolio with US or international holdings.
In my case, my US portfolio has outperformed the index the last 10 years by double-digits net of fees. It's not even close. Proving that having a manager does make a difference and I don't have to worry about "drag" on my portfolio due to fees.
P.P.S. Throughout these discussions, I keep seeing some pretty generous numbers being thrown out there about the performance of the index. Since inception, the TSX60 has returned a little over 7% and in the last 10 years only a little over 5.1%. Let's keep things in perspective folks.
The long term market return is approx. 8%
If the fees for a Pro managed portfolio are 2% that leaves 6% for the client
Invest $100,000 for 30 years @ 8% = 1,006,266
Invest $100,000 for 30 years @ 6% = 574,349
That is a very significant difference in affordable retirement lifestyle
For some this is not an issue, however for many that difference is a lot of money & given most advisors do not beat the market after fees it makes sense for some to educate themselves and manage their own money
I believe that 8% figure is for the US, however a lower return (if you insist) just implies the fees are that much bigger a slice of the pie however it is moot
No you made that assumption. In the real world most managers do not beat the market after fees & that is all that mattersYou have made a common mistake in making the assumption that performance numbers for managers do not already account for management fees. They do. Instead of hypotheticals, how about a real world example?
