1

[Country is South Africa but I am also interested in this in the context of the U.S. / Europe]

A good friend of mine has trusted a wealth manager with her sizeable portfolio for the last 6 years. Her goal has been to maximise profit over the long term. As a friend I offered to take a look at her investment portfolio. There are red flags; namely:

  1. no ETFs; only active investments (fees are between 2-3%)
  2. overly complicated portfolio consisting of ~20 actively managed funds

When looking at the growth of her portfolio, it has barely kept up the inflation rate of (6%/year); and the net worth of the portfolio would be significantly larger had she invested in a low-fee global ETF. Here is the analysis I did (y-axis linearly scaled to conceal real amounts): enter image description here

I can only conclude that this wealth manager is either:

  1. taking advantage of my friend
  2. clueless about long-term investing

Is a wealth manager legally liable for poor investment advice? It only took me a book and a few blog posts to gather enough information to fully appreciate how bad this portfolio is.

Another look at it: When we go to a mechanic for a vehicle repair, we trust the car mechanic to repair only what needs to be repaired and nothing more. Sometimes this doesn't happen and we get ripped off. One might lose out on a couple hundred dollars at worst (I would guess?). However the difference between good and bad investments on a sizeable portfolio can amount to strikingly large differences that cut away at earnings year after year.

Is her wealth manager in any way legally liable?

  • This might be a better fit for Law. – Lawrence Dec 21 '19 at 8:53
  • 3
    Why do you have a line showing inflation plus an ETF? If the inflation rate is 6% and the return on an ETF is 7%, you can't somehow combine the two to get a portfolio with a return of 13%. So that part of the chart doesn't seem to make sense; can you clarify? – Tanner Swett Dec 21 '19 at 15:28
  • It is number in terms of south african rands you will end up with. If I just used 7%, forgetting inflation, that would lead to a number slightly above inflation - which would not be the correct ETF yield. Do you have a suggestion on another way this figure could have been drawn? – Oliver Angelil Dec 22 '19 at 4:23
  • @OliverAngelil well either you show comparable figures with or without inflation, doesn’t really matter that much, but you cannot combine them. If you find that an ETF yields 7% and inflation is 6% then your inflation adjusted return is ~1%. – ssn Dec 22 '19 at 11:07
  • @ssn I don't understand. The 13% is roughly the growth you would experience. This growth is a consequence of 2 things: inflation + investment. The value of your money wont increase because of inflation, but the numerical amount will, and that's why I've factored it in. Apologies for my ignorance if I'm missing something. If you have a url to a page explaining these concepts I would be glad. – Oliver Angelil Dec 23 '19 at 13:43
1

1) No in such a case he cannot be held legally responsible, I would assume something is written on the fine print regarding no guarantees.

2) If he could be held responsible and perhaps make up the difference, then it would basically be risk free. Meaning he would assume huge risks himself, and his fees would probably outshine any excessive surplus. Some pension funds offer guaranteed investments, meaning they hold legal responsibility; typically they offer (in current environment) perhaps 1-2% guaranteed. Which is definitely not “maximizing the portfolio”

You use the phrase “maximize portfolio”, which typically doesn’t go hand in hand with ETFs. Not if you are trying to beat the market at least, which I assume “maximizing” means in this case.

Last note, I assume your friend has had access to look at the underlying assets quite a few times over the years, and that the manager is probably somewhat transparent - then it is a bit difficult to come afterwards and trying to claim something. Imagine eating a whole steak at a restaurant and afterward finding out there were other steaks at other restaurants that were bigger - you can’t come back and tell the restaurant that you wanted a bigger steak and they should make up the difference.

| improve this answer | |
  • I'm not sure it's so simple. There are many types of investment advisor/wealth manager. Some advisors have a fiduciary responsibility to the client, which is imposes a strong obligation to follow "best practices". Other advisors only have a responsibility to choose "suitable" investments for the client. For others types of financial advisor it may indeed be caveat emptor. It depends on the exact relationship between the advisor and the advisee and the exact rules of the country the advisee and advisor live in.. – Charles E. Grant Dec 21 '19 at 15:00

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.