Why do many wealthy people get deceived by expensive, under-performing money managers who charge high fees, but deliver inferior performance compared to cheaper passive investment funds?
When you get older, you no longer want to be bothered trading or even watching your investments. You want somebody else to do asset management for you. The only problem is that if the guys at the bank were really good at it, they would be rich themselves, not managing other people’ s money…
Money Managers and Their Service
Aggressive but smooth, well-dressed executive type bank money managers show you charts of how well they are doing. Their bank is 300 years old and very reliable. You sign up for sample management with a part of your millions. Then, as a new customer with even more for them to manage in the future, they give you “perks.” Like what?
Like theater tickets, nice lunches, and other goodies. In one case, we got 3 “free” nights at a luxury “yacht” hotel, meals, concert tickets, and an invite to party with similarly situated clients. All interesting, retired wealthy people. Very pleasant indeed. They do their best to make you happy. Chocolates for every birthday and anniversary in the family, plus many small gifts, get well cards, and other loyalty-building stuff.
In contrast, investments in an exchange-traded fund give you nothing except a monthly paper statement. Sometimes up, sometimes down. No love there.
The Secret Is in the 1% Fee
In my case, I was very happy indeed with the expensive, under-performing money managers who charge high fees but delivered inferior performance. Until I found out that the itsy-bitsy under 1% fee they were charging amounted to a sum (well I won’t say what it was because you wouldn’t believe me). It could almost buy an apartment in Monaco! Anyway, that fee would have bought me 200 times the perks and chocolates I was getting.
As you surmised, the performance of my investments under management was what you’d call “capital preservation” certainly not making money. But those index funds are actually more volatile and worrisome.
Money Manager the Lesser Evil
For the moment I am sticking with those expensive, under-performing money managers who charge high fees but deliver inferior performance.
Am I a sucker? Probably yes.
In my own real estate and other business deals, I take little to no risks in my arbitrage trading… I make infinity on little no investment.
That is because I know what I am doing. It is not that hard, but it takes time and effort. I explain it all in my books and reports. Most people don’t have the desire or self-discipline to make serious money even if I explain it to them in baby-talk.
I am losing the desire to do deals or properly administer/manage assets as needed. So, now I do let money managers invest my dough in securities they pick out for my “conservative” account. Result?
In the past 15 years, I have certainly lost maybe 50% or more of my purchasing power. I suppose that is why I write in my reports and many of my posts here and elsewhere.
Gold Investment over Having a Money Manager
These days, physical gold (in small units) is the best investment for when you get older and don’t want to be a wheeler-dealer or player anymore. Why?
The price of physical gold, in general, keeps up with inflation, the volatility is low, the liquidity is there for any amount. Storage costs are minimal. You don’t have to think, worry, or check the price-quotes every day.
When we had 9% interest rates, there was a considerable “lost opportunity” cost to holding gold, but with 1% interest, and 5% inflation, the reverse is true.
Still, one should never keep all eggs in one basket. Not even Gold!
It is conceivable that as with artificial pearls or diamonds, scientists could figure out how to synthesize gold, making my physical gold stash worthless.
Gold, in fact, did lose 90% of its value when the Spanish Conquistadors brought back huge quantities from the Aztecs. Nothing is 100% safe and sure. Diversification = safety.
And so, for now, for some stuff, I still use expensive, under-performing money managers who charge high fees but deliver inferior performance.