A model story from practice. This story brings together several situations we deal with repeatedly. It is not about one particular client.
He had been asking himself the question for almost two years, by his own account. He had never said it out loud.
“Am I paying too much for all this?”
He was in his mid-forties and had been building his investment assets for twelve years through regular contributions from his income. Over that time he worked with three advisors. Each arrived at a different stage of his life, with a different view and a different investment solution.
Some of the older investments stayed, others were added along the way. In the end the table held seven funds, two insurance policies with an investment component and one contract the client was not sure was still running.
And one thing about the whole situation stood out: nobody had lied to him.
For each investment he had received the documentation, the cost information and the terms. He knew that managing a fund costs something. In twelve years, though, nobody had shown him what it all cost together, what the individual investments actually held and what role each of them played in his portfolio as a whole.
First we needed to find out what he was really paying for
So we started counting.
Not only the entry fees the client remembered from signing. For each investment we went through the ongoing costs, any performance fees and the conditions attached to exiting.
Only once the individual items sat side by side did the real picture emerge. The total cost was significantly higher than the client had expected.
His first reaction was understandable:
“So which expensive funds do we replace with cheaper ones?”
And this is exactly where the more substantial part of the analysis began.
One of the more expensive investments, the one the client himself saw as the first candidate for change, ended up staying. It had a clear role in the portfolio, and the way it was managed and the results it delivered gave a reason to pay more for it.
The level of a fee on its own does not tell us whether an investment is good or bad. We need to know what the client gets for it and how that investment fits into the portfolio as a whole.
Seven funds do not make a diversified portfolio
The second surprise was not the costs, but the composition of the portfolio itself.
Several funds invested in very similar assets. At first glance the portfolio looked diversified, there were several products and several managers. Looking inside, part of the investments overlapped considerably.
More items therefore did not automatically mean more different sources of return or a better spread of risk.
At the same time the client had no real cash reserve. Practically all his available money was invested.
And the contract he was not sure still existed?
It did. For eight years an amount had been leaving it every month that the client barely noticed any more. On its own it was small. Over eight years it was not.
Not everything needed to change
The goal was not to scrap the old portfolio and build a new one in its place.
For each investment we worked through three questions: what role it plays in the portfolio, what it costs and what it would cost the client to change it right now.
With some products it made sense to continue. With others, to exit gradually. And some investments could be merged, because they were in fact doing almost the same job.
The whole change therefore did not happen at once. With some products a quick exit would have meant unnecessary costs, so we spread the further steps over time.
In the first year we added no new investment for the client at all.
Not as a matter of principle. His portfolio did not need adding to. It needed taking away from first.
And what does our work cost?
When we go through the costs of a client portfolio, our own fee belongs in the same overview.
The client pays us directly for a professional service. We accept no commissions from funds or other providers of investment products, so our fee does not depend on which particular solution we recommend.
The fee has two parts: a one-off fee for building the investment solution, which includes the analysis of existing investments, and an ongoing management fee. That one is calculated as a percentage of the average value of the portfolio under management.
With this client, the analysis of what he already had made up a substantial part of the first phase of the work.
So the client knows not only what the individual investments cost, but also what he pays for investment advice and for the long-term care of the portfolio.
This is not about hunting for investments “with no fees”. It is about every cost being visible, understandable and having a reason.
What it looks like today
The client holds fewer investment positions and for each one he knows why he owns it.
He knows the total cost of the portfolio and what it is made up of. The regular amount he invests every month has not changed. What changed is where it goes.
And for the first time in twelve years he also has a cash reserve, money that is not invested and does not need to be.
The most important change, though, is not in the number of funds.
For the first time he does not see his investments as a set of contracts signed at different times, but as one portfolio in which every part has a purpose.
What to take from this if you hold investments from several advisors
- Look at the total cost of the portfolio, not only at the entry fees of individual products.
- More funds or more managers does not automatically mean better diversification. What matters is what the individual investments actually hold.
- A higher cost is not in itself a reason to end an investment. What matters is what you get for it and what role it plays in the portfolio.
- Before ending an older investment, work out the cost of the change itself. Sometimes waiting makes more sense.
- Managing a portfolio well does not only mean adding new investments. Sometimes the most important decision is to add nothing, or to take away gradually.
Your situation will be different, which is why we need to talk about it first.
