Tricky business of financial advisory
This week I would like to discuss the problem of high fees charged by different financial advisors for their services. It is reasonable to assume that different hedge funds, private equity companies, mutual fund managers try to oversell their services. For instance, this video despite the fact that it is a bit old shows how service providers can manipulate the customers emphasizing the importance of past performance which should predict the future.
The book called Financial Times Guide to Investing written by Glen Arnold shows an example of inability of financial advisor to produce decent returns for its client. The author had taken 5 cases of different investment scenarios. They are theoretical, but seem realistic. So first one you take $20,000 and invest by yourself exercising your stock picking skills. In the second and the third case you invest the same amount of money in the unit trust(synonimous to mutual fund as it is used in the US) from provider (initial charge 5%, annual charge 1.5%) or in a unit trust with reduced initial or annual charge( initial charge 1.5%, annual charge 1%). In the fourth case you put your 20 thousand in an Exchange Traded Fund (initial charge 0%, annual charge 0.3%). In the last case you invest in hedge fund ( initial charge 0%; annual charge 20% plus 20% of any positive return on the fund). Finally, self investment yielded the best results and the worst investment return turned out in hedge funds.
Of course these are subjective analysis as the returns were assumed the same for each scenario. Moreover you can not go to a hedge fund with only $20,000. Definitely, there are some bright fund managers who have the necessary technology and expertise to outperform S&P 500, but they will not do it every year.
What is your opinion regarding aforementioned services? Would you trust your money to a mutual fund or an Exchange Traded Fund? If you would hire a financial advisor what questions would you ask him/her regarding the performance of a portfolio?
