Is there any point in stockbrokers?
July 20, 2013 6:30 AM   Subscribe

How much professional advice do I need to manage $600k of investments? Advice for meeting on Monday please!

So I've recently inherited around £400k ($600k). This money has always been held in the form of investments with my family's stockbroker and on Monday I have a conversation with her to talk about how to handle this money.

Now I'm not a complete novice in this area. I already have around £80k in savings that I've been managing myself through an online stockbroker (TD Direct). I've always been a disciple of the value investing philosophy of 'hold for the extremely long term', and completely opposed to stockbrokers churn your investments to generate commission. I've already explained this by email to the stockbroker:

"I am not looking for shares to be actively managed, and am quite happy to hold a very diverse and conservative range of stocks and bonds for the very long term, never selling anything and reinvesting any income. However, I might be interested in some initial advice on establishing a portfolio"

She replied:

"I will be honest and say that if you want to just buy stock and hold it without any management, this can be a sure fire way of losing money, as modern markets are so volatile."

Now, obviously she would say this as it's in her interest to generate commission, but I just want to make sure I haven't missed anything here. What are the risks of managing a large amount of money yourself? What is the value of professional advice in this area? I'm thinking I can have a few initial consultation sessions with her where we choose a portfolio. I could then talk to her again each year, and reinvest any income to rebalance the portfolio. Does this sound like a good plan? Frankly I feel a little out of my league with this amount of cash, and don't want anything to go wrong.

Thanks for your help!
posted by anonymous to Work & Money (25 answers total) 7 users marked this as a favorite
Figure out all the fees involved, some brokers charge a yearly percentage.

If you don't want to deal with selling anything, you could transfer to a discount brokerage and buy mutual funds. Make sure this won't impact your taxes in some way first.

What are the risks of managing a large amount of money yourself? .... I could then talk to her again each year, and reinvest any income to rebalance the portfolio.

It sounds like you are saying you want to manage the money yourself, but you want to have the stockbroker manage the money. You can go with a discount brokerage if you want to do it yourself, if you buy and sell stocks through her you'll be paying more (assuming it works the same way in the UK as the US)

I feel a little out of my league with this amount of cash, and don't want anything to go wrong

The stockbroker cannot (as a practical matter, and in the US it would be illegal to make the claim) guarantee that you won't loose money following her advice as to what stocks to buy.

reinvest any income to rebalance the portfolio

If dividends are being reinvested, you won't be able to rebalance the portfolio without selling something. Some of your stocks will go up, some will go down, maybe you'll want to buy stock in the spaceship industry some years later. It doesn't make sense to pay for multiple sessions at the outset (if she is a fee based advisor) and never sell anything ever again.

If you are extremely risk averse, you can purchase investments that are guaranteed to pay out a fixed amount. Watch for fees if you buy these through a broker. Look at all the fees, front-end, back-end, maintenance fees, etc.
posted by yohko at 6:51 AM on July 20, 2013

If you're able to manage the money yourself there is no need to rely on someone else to do it.

The stockbroker is talking her book by saying that her management of it will prevent losses.

Personally, I manage all my own money and have resisted entreaties from various "wealth managers" over the years; I do not think their excess fees are worth the performance they claim to get.
posted by dfriedman at 6:57 AM on July 20, 2013 [2 favorites]

you have not missed anything, and that response is terrible enough that I wouldn't even go ahead with the meeting and instead focus on finding an advisor who shares your views.
posted by JPD at 7:13 AM on July 20, 2013 [10 favorites]

You should very definitely stay far away from her, the line you quoted is the worse kind of slimy salesmanship bullshit. You have various better options, like a fee-only advisor, or managing it yourself using low-cost index mutual funds.
posted by Perplexity at 7:15 AM on July 20, 2013 [14 favorites]

If you don't trust her, don't use her. The value in using a stockbroker is generally in their research department. It also used to be in execution of trades, but at the level of investments you are talking, liquidity is not a factor.

If you go the discount broker route and execute your own trades after doing your own research, then the burden of the research is shifted to you. Keeping up with industries and specific companies can be a real time suck and without some expertise, difficult to do.

In other words, the value of a broker's advice and thus the commission paid to obtain that advice is only determinable based on the alternatives, either a different broker or your own work. If you think value investing is about thinking of a "good company" and buying the stock and sitting back 10 years to sell, I posit you need a broker. In some ways, just asking for advice for the meeting yields me to believe that you may be in over your head.

One way to do it, would be to simply make the investment on the market in general or a specific industry in general rather than on individual stocks. Buy (or short) an ETF on the S&P 500 or whatever diversified average there is in your home country.

As for how much you can lose either doing it on your own or with help, the answer is all of it.
posted by JohnnyGunn at 7:20 AM on July 20, 2013 [2 favorites]

Both of you are right and wrong. Buying a position and holding for the long run is a good strategy assuming the company doesn't start heading for the drain (in which case, why would you not want to sell that stock?). At the same time, it's critical to regularly examine the portfolio (at least yearly) to ensure it is well balanced, spread out, and that you don't have too much money in any one company, geography, or segment. This is especially true since you are now combining your existing portfolio with your inherited portfolio, and those two have probably never been looked at together before, so will be totally out of whack when combined.

By the phrasing of your question, you seem to assume your broker is looking to buy and sell on a very regular basis (daily, weekly, whatever). Talk to them. Their idea of active management might very well be this initial analysis and re-balancing, annual reexamination, and active monitoring to make sure nothing in the porfolio is tanking.
posted by NotMyselfRightNow at 7:37 AM on July 20, 2013 [2 favorites]

stop. go to a paid fee only certified financial consultant. They have no interest in earning commissions. He/she will do a complete analysis and make recommendations on your current holdings and future possibilities. For an 800,000 portfolio I would expect to pay about $1000. to$1200. for this advice. It will take an hour or two, you will need to provide all details on your holdings, retirement goals etc. A week or so later you will meet again and he/she should have a stack of reports to go over with you.
posted by Gungho at 7:45 AM on July 20, 2013 [7 favorites]

I agree with gungho. If you pay to have your assets under management (cheap would probably be 1% annually) you are giving away 20% of your money over next 20 years.

Better to pay an unbiased source for information, and update occasionally. A well diversified portfolio of low cost ETFs is likely optimal for your situation. It is definitely not rocket science, but nice to get the input of someone who knows what they are doing. Keep trading to an absolute minimum. It is costly, and often ill timed.
posted by jcworth at 7:56 AM on July 20, 2013

She tells you you'll lose money if you invest on your own yet she can't and won't guarantee that you won't lose money with her or that you will make more with her. Need you know anything more?
posted by Dansaman at 7:57 AM on July 20, 2013 [2 favorites]

Seconding paid fee only certified financial consultant annually, plus your own prudent management.
posted by theora55 at 8:21 AM on July 20, 2013

She replied:

"I will be honest and say that if you want to just buy stock and hold it without any management, this can be a sure fire way of losing money, as modern markets are so volatile."

Either she is stupid or she hopes you are. You explicitly described a long-term portfolio balanced between and within asset classes, and her answer is not to "just buy stock"? Fire her.

All you want is the lowest-fee way of getting that money into a long-term growth fund. In the US I'd point you at Vanguard, but a local fee-only advisor will know what works where you are.
posted by nicwolff at 8:33 AM on July 20, 2013

There was a famous study looking at the performance of various 401k funds and the result was that the best performing ones (or the most significant variable of performance) had no fees. It wasn't that they were smarter or better it was just that they had no fees and so they return wasn't eaten by the managers.

Here's my suggestion.

First, go open up a Vanguard Flagship Account. They're philosophy is that the best thing to do with your money is to hold it in index funds and their index funds have no fees (or tiny not-as performance one time fees). Put 2/3 of it in safe investments that are long term - you don't plan on taking out any of it within the next year. Take 1/3 of it and select a few companies that you think will strongly perform and invest in stocks and bonds of those companies.

One of two things will happen. You'll either lose a bit of that 1/3 and decide to put it all in the "safe" pool. Or you'll find you're better at investing than you thought and make a bit of a return over market. As long as you invest in companies with decent P/E ratios and market capitalization over a billion it's hard to lose too badly.

But really. Don't go to a money manager. They're vultures.
posted by ishrinkmajeans at 9:20 AM on July 20, 2013

The existing investments are your portfolio. What you do with their income is up to you: reinvest, spend or save.

I have investments through gifts and inheritance and for the most part have kept them as they are.

If you sell the stocks you will have to pay capital gains taxes.
posted by brujita at 9:26 AM on July 20, 2013

OP is in the UK so US specific advice does not apply. And the cost base on the shares will be when they were inherited, so Cap Gains taxes may not be that meaningful.
posted by JPD at 10:08 AM on July 20, 2013

"I will be honest and say that if you want to just buy stock and hold it without any management, this can be a sure fire way of losing money, as modern markets are so volatile."

Well I will be honest and say that her response is really disingenuous and makes me inclined not to trust her. And I'll also be honest and say that the management fee that she will charge and the transaction fees that she will incur in buying and selling will insidiously demolish your returns over time and serve to make her a tidy profit and drastically reduce the amount that your portfolio will grow into.

$600k is almost the exact size of my portfolio. I manage it myself. Here is what I would do in your situation:

(1) Cancel your meeting with her.

(2) Don't do anything with the cash right away. Take some time to learn what you're doing. It's really not that hard. More on this below.

(3) If you must see a financial advisor, you do not want to see a stockbroker. A stockbroker is not looking out for your interests, they are looking out for their interests. You want to see a person you pay a flat fee for that does not manage any of your assets: in other words, someone you pay just for advice. It may behoove you to see someone who can provide advice on tax implications, for example (I'm in the US, and have no idea what your tax implications may be). I'll treat the rest of this answer putting all tax considerations aside.

(4) The big picture is this: yes, you want to buy and hold. And you're correct that you want to rebalance. Rebalancing once a year is fine (although other rebalancing strategies are probably fine, too). Your portfolio should be a blend of equities from around the world and fixed income (bonds). Your guiding principles are: except when you rebalance, you want to buy and hold. You don't want to chase hot investments and sell investments when you think they are declining. You want to own diversified investments: in my opinion, you want to do your best to capture the return of the entire market, and you do this by owning mutual funds like "total stock market" and "total bond market" (these are US-centric, you would complement these with funds like "total international stock"). You want to keep expenses to an absolute minimum. Expenses crush returns. To minimize expenses, you invest in passive index funds, not actively managed funds. For really compelling reads on these principles, check out John Bogle's The Little Book of Commonsense Investing or Gordon Murray and Dan Goldie's The Investment Answer. Finally, you need to decide which amount of each asset class to hold. This is a critical decision.

(5)This decision is called "asset allocation," and according to Modern Portfolio Theory, a portfolio that holds both stock funds and bond funds is less volatile but produces nearly the same return over time as a portfolio made up entirely of stock funds. At a minimum, you should hold 25% of your portfolio in bonds, and the closer you get to retirement age (when you can't really afford volatility--can you imagine being 65 and losing 50% of your portfolio? This actually happened to people in 2009) you should hold a greater proportion in bonds. This allows you to weather market downturns. You also want to decide how much of your portfolio to allocate to major stock markets in the US and to the rest of the world.

(6) Then, you monitor your portfolio, and at least once a year (or sooner, if one of your asset classes soars/plummets putting everything off by, say 5%) you rebalance to conform your portfolio to your asset allocation. The beauty of rebalancing is that you sell high (your assets that have performed really low) in order to buy more of the assets that have underperformed (buy low). Buying low and selling high is how you make money in investing. You would be amazed by how many people buy high (chase hot performers based on recent results) and sell low (dump their "losers" or panic when the market drops...and the market will drop).

(7) To use a personal example, my asset allocation is 50% in US stock index funds and 25% in international stock funds, and 25% in bond funds. Each year when I rebalance I will increase the amount in my bond holdings by a percentage until I'm ultimately close to 40% in fixed income. The transaction fees I incur annually amount to about .13% of my holdings, or about $800 a year. If I were to go to a broker who charged only a 1% management fee, I'd pay $6000 a year, plus I'd still incur the transaction fees on top of that, which would likely be another $6000, or possibly more. This would be $11,000 that I would lose from my portfolio annually for no good reason. Over a 25 year period, if I were to assume my portfolio would grow only at 6%, this would cost me over $600,000 because of compound interest. Crazy, right?

(8) Look, you can absolutely do this yourself. Do not make any rash decisions. Cancel your meeting and give yourself a chance to learn. I promise if you go into her office on Monday, you will leave with her managing your money, and over the long term it will cost you hundreds of thousands of dollars.
posted by sock me amadeus at 10:49 AM on July 20, 2013 [13 favorites]

In the US, properly managing that amount of money could be very time consuming depending on how often you need to rebalance your portfolio. For example, say you have a stock or two that give out lots of dividends and are also increasing in value 8%+ a year. You might have to rebalance quarterly instead of annually to keep up your investment strategy. Would you be comfortable researching additional investments, selling off necessary positions and then reinvesting that money? If you're not cool with any of those three things, you should get a financial advisor that doesn't receive a commission based on how much you buy or sell. (I would say an advisor with fiduciary duty but apparently that's not a thing in the UK. A CFA might be acceptable because of the organization rules.)

A typical percentage is 1% of assets under management but its not a hard or fast rule and you might be able to find someone that would charge 0.75% or so. As someone pointed out upstream, that's 20% over 20 years. I'd like to add that that's only true when your money is going nowhere. If you're paying someone a fee to manage your money it had better be doing better than 0% a year. In a 20 year span, 5% a year would be fairly conservative(based on normal economic expectations) so would a 4% gain be worth it? At around $250,000+ it's less, "I spent £x,xxx a year" and more "my increase was only 2.75% this year instead of 3.75%"
posted by fiercekitten at 10:57 AM on July 20, 2013

I meant to add that she isn't completely wrong about holding for the long term being foolish. People thought Kodak was a sure thing up until it declared bankruptcy. Markets change and buying a position and never reviewing it for profitability or revising how much you hold of it is as bad as constant portfolio churn. I might give her one meeting, just so you know how a commercial-minded broker phrases its message. But I would also schedule a meeting with a chartered financial analyst or something to get a sense of how fee-only advising works.
posted by fiercekitten at 11:07 AM on July 20, 2013 [2 favorites]

I cannot favorite Sock Me Amadeus' answer enough. It is completely, completely correct.

(Anecdotally, I can tell you that stockbrokers view existing customers whose investable assets have suddenly increased as muggers view drunk tourists who have just stepped out of the ATM vestibule. Do not take that meeting.)
posted by minervous at 11:13 AM on July 20, 2013

She replied:

"I will be honest and say that if you want to just buy stock and hold it without any management, this can be a sure fire way of losing money, as modern markets are so volatile."

She is correct that you don't just want to buy a few individual stocks and hold them. You can, however, safely buy a few low fee index funds and almost never look at them again.
posted by empath at 12:49 PM on July 20, 2013

I will be honest and say that if you want to just buy stock and hold it without any management, this can be a sure fire way of losing money, as modern markets are so volatile.

Who starts off saying 'I will be honest'? Isn't that expected? Shouldn't it be?

'Better trust than believe em'
posted by hal_c_on at 2:10 PM on July 20, 2013 [1 favorite]

(5)This decision is called "asset allocation," and according to Modern Portfolio Theory, a portfolio that holds both stock funds and bond funds is less volatile but produces nearly the same return over time as a portfolio made up entirely of stock funds. At a minimum, you should hold 25% of your portfolio in bonds, and the closer you get to retirement age (when you can't really afford volatility--can you imagine being 65 and losing 50% of your portfolio? This actually happened to people in 2009) you should hold a greater proportion in bonds. This allows you to weather market downturns. You also want to decide how much of your portfolio to allocate to major stock markets in the US and to the rest of the world.

this is not correct. the part of about a portfolio of a risky asset and a less risky asset returning the same as just a portfolio of a risky asset is incorrect.

You hold bonds to reduce volatility, the more volatility you can take the less your bonds should be. In a normal environment someone with 20 years + towards retirement should hold no bonds, by the time you get to 10 years from retirement the bulk of your portfolio should be bonds. This advice is even more important today because we are at generational highs in the bond market.
posted by JPD at 2:13 PM on July 20, 2013

What sort of investments are they? With stocks you can have the dividends transferred directly to your bank account or reinvested. In the US you can have the same done with mutual funds or set up a money market account with the fund and have the capital gains/dividends transfererred there.

After 9/11 I was getting calls from unctuous young men associated with one of the fundholders. When the last one asked how he could best help me, I told him to stop calling me. He then asked how would I know my money was being used to its best advantage and I told him that was really none of his business.
posted by brujita at 4:52 PM on July 20, 2013

I think you can do the same thing with the interest from bonds.
posted by brujita at 4:53 PM on July 20, 2013

There has never been another occupation so richly rewarded for lack of competence. I'm not aware of any academic evidence, nor audited information on investment adviser performance, suggesting that any professional adviser or discretionary investing system available to us can outperform the market indices over the long term (e.g. ten years), much less create lower volatility while outperforming the stock markets over the long term. You can research this at One of the last simple non-discretionary systems that probably worked consistently was the Turtle system. One of its creators says that it stopped working decades ago, long before it became publicly available. For a price, of course. See Jack Schwager's Market Wizards for fascinating profiles of the Masters of the Universe.

Television pundits and brokers will destroy your returns with faulty recommendations and friction (transaction and management fees), and create capital gain and loss tax problems for you by regularly churning your account from one stock to another. One hyperventilating CNBC pundit shouts out many thousands of "recommendations" per year but won't reveal his personal track record for the past ten years. You can find tracking websites for his TV recs and the results don't inspire confidence. Almost all of the thousands of hedge funds have underperformed the market in recent years. One of the few that hasn't is the subject of a multi year federal investigation for insider trading.

You are not a novice and may believe you have, or can develop, above average skills in investing. All of us believe the same or we wouldn't be in this business. Unfortunately, the research shows that amateurs (retail investors, you and I) consistently underperform the indices by 3-6%/yr. And the harder we try, the worse we do by increasing our trading frequency. We are an optimistic lot but also are the most hunch driven, most emotional, most poorly informed and least skilled group of any working in the markets. We have little or no practical insight regarding technical analysis, the persistence of trends, investment timing, volatility, company valuations, future company prospects, the corporate competitive environment, monetary policy, world economic conditions, the random importance of lesser known market drivers and how all those factors in shifting combinations affect stock price movements. How long will it take you to become more accomplished than most of your competition in each of those areas? So if we are crazy to be playing the market, or letting ethically compromised commission earners do it for us, what else is there to do?

Make randomness your ally. Spend an hour per year rebalancing a handful of low cost index ETFs grouped into "Lazy Portfolios", thus buying low and selling high. Marketwatch's Paul Farrell keeps track of the performance statistics of Lazy Portfolios here:

The page also lists the annualized performance of the S&P 500 for comparison, but don't think that should be the only measure. The S&P 500 is the only index shown there in order to keep the comparison simple. Consider volatility and comparisons against international stock ETFs and bond ETFs. On the same Marketwatch page are story links about the LP approach. While the LP's don't always outperform the S&P500, they will always perform better than you or I are able to. Farrell also answers questions about LPs on Twitter.

The only guaranteed way to make a million in the stock market (other than starting with two million) is to take the broker exams and then sell dreams to retail investors. In my opinion your stockbroker is a deceitful hack who doesn't put your financial interests beside or ahead of her own interests because she has no legal obligation to do so. Is there any reason to believe someone would ever sell us a way to beat the markets for a miniscule 2%/yr, especially if they could leverage that private information to make 15-25%/yr for themselves? While it might not sound like it here, I'm not bitter about brokers and haven't had bad experiences with them. They are charming, engaging people. And that's the other key to their personal financial success.

They know better and yet continue to roll nest eggs as dice. Not their own, of course. Don't let it be yours, either.

Good luck!
posted by paphun123 at 9:12 PM on July 20, 2013 [1 favorite]

I don't have the problem with that broker's email that the rest of you folks seem to have, though it was poorly thought out for a first contact, and I think it's likely she's not the right person for you. This is a conversation that should have happened on the phone, in my opinion.

"I'll be honest" means "I am not going to bullshit you and write a whole paragraph that obfuscates that fact that I like to trade more than you might approve of" (which would be a pretty normal thing in that industry, I'm sorry to say.)

I think she's right in that "buy and hold" without some intelligent oversight (which is what many people view as buy and hold) is going to lose you money. It's possible that you're using different definitions. If she means that more management is better management, it might not align with your views, but I don't think it means she's (particularly) corrupt. She probably feels it's true. It's easy to justify things that make you more money, but most brokers I know would agree with her depending on what you mean by "hold". A year? Ten years? Even if the company sank down into penny-stock territory?

People generally hire managers because they either don't feel capable of doing it themselves or because they don't want the bother- it's a nice chunk of time to keep track of what various stocks are doing. Management firms hire people who specialize ONLY in small stocks, or ONLY in foreign small stocks, or foreign large stocks, etc etc. That kind of specialized research is what you're paying for.

If you feel comfortable investing without that kind of research behind you, then do it. Many people manage to do quite well. For myself, I'd find a good management company and let them do it, but I'd certainly find someone who's on the same page as me, and this woman isn't.

At $600k, it's very likely to be worth buying stocks rather than mutual funds. Mutual funds are great for small accounts because you aren't too heavily invested in any one company, but there are fees in there. There have to be- people aren't doing do it for the joy of their jobs- they expect to get paid. With $600k you've crossed into the ability to diversify mutual-fund-style without the mutual fund fees.

Here's another thought, though. If the broker doesn't do anything all year, are you going to be angry about that? Even if the broker was keeping a close eye on things and didn't feel anything needed buying or selling? People get really cranky when they feel ignored or like they're paying for "nothing", when what they're paying for is expertise, which may or may not involve action. (A bond manager I know deals with this. Even though he charges by transaction, and only buys things once in a while, people feel ignored if he doesn't move things around, so he has to do a big explanation once in a while to remind people that him NOT buying and selling things works in their favor.)

(And for all you Vanguard lovers- yes, Vanguard has fees. They might be lower, and you definitely can't see them, but ALL funds have fees, most of which are hidden, which is a scandal in and of itself, but so far it's still completely legal.)

My advice:

1) CALL a couple more management companies and explain what you want and what your fears are. There are so many ways to pay, for instance. How about a retainer fee of $1000 per year, plus transaction costs/ commissions, but you have to be consulted and approve of every one of them? That is a perfectly normal way to pay.

2) If you don't find someone you "click" with (which is incredibly important, so take your time), set up a portfolio that makes sense to you, and pay an hourly-fee-only financial advisor to see if s/he sees any big red flags. Do this once a year.

3) Rebalancing. Research this. There are all sorts of studies. Most say that the less you rebalance the better. (I read one that said that portfolios rebalanced only once every THREE years did the best, but I don't know if that's the latest.)
posted by small_ruminant at 9:52 AM on July 22, 2013

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