Investing small portion of assets with financial advisor

Question

I have seen most financial advisors charge a fee on managed assets amount. Instead of having all assets with FA, can I just have 10 percent managed and then scale up the rest myself on another account? What I mean is that this 10 percent is meant to be invested for retirement long term and I would see all the rebalancing and holdings, so I can copy them myself on another account and thereby not pay a fee on the rest of 90 percent. Or am I breaking some laws here? Based in the US

Answer 1

If the advisor was acting in your best interests, they would want to see your entire financial picture. That way they would know the purpose of the funds they are helping you with.

If you don't tell them about your bank accounts, retirement funds, taxable funds, or funds for your child's education; how can they give you advice that is tailored to your situation.

You would be better off finding an advisor that can for a set fee give you advice that takes into account your entire financial picture along with your income and plans.

Hiding all of this except 10% will give you a plan that doesn't match what you need.

Answer 2

Please provide a location, however I am assuming the US.

Many advisers will offer, free of charge, advice on what funds to use in your 401K provided you are a client for your other accounts.

What you are suggesting is allowable by law, but in some cases not permissible and it may not even be in your best interest.

First you would have to keep the "90%" secret as the adviser will push to get that other 90% (assuming it is outside your 401K).

Second you will have to seek an adviser that uses publicly traded funds only. There was a time that there were many funds that were closed to the general public, one had to have an adviser in order to invest. I am not sure of the current status of this kind of thing, but I am sure there are some. Much of the information is close hold so it would be difficult to replicate this with publicly traded funds.

Third is why? Many advisers use heavily loaded funds. The tell tale sign of this is having to choose between "A shares, B shares, or C shares". While index funds from the larger brokerage houses (Vanguard, Schwab, and Fidelity) run in the tenth of a percent these funds can be over 5% per year. If they do out perform the market they rarely make up for the increased costs. Even actively managed accounts from those larger houses have fees that are a fraction of those used by many advisers.

Most advisers use a cookie cutter model for clients, especially smaller ones. Given that you are suggesting 10% of your portfolio, it is likely you will always be a smaller one. That pattern is 40 to 80% in stock funds, 10% in real estate funds, and the rest in bond funds. If you find a particularly bad adviser they might suggest some gold or crypto. The percentage of your stock to bonds will depend on your age and risk tolerance.

This is pretty easy to replicate using index funds from one of the previously mentioned brokerages. Building money in your 401K is a bit different as you are typically limited on choices. If you're talking about retirement money, just go for 100% stocks until you are close. And don't worry about interim swings.

In my own case, my retirement funds follow one model, my taxable accounts another, and my HSA account another. It is unlikely that someone else can come up with as detailed a plan as I have done for myself.

IMHO a person will have at least two jobs during their working life. The first is whatever profession they choose. The second is to manage their finances. No one can do that for you effectively as you can.

Answer 3

The advice that you'll get from a financial advisor will often be different depending on the total size of the portfolio.

There are some investments that have minimum investment amounts. If the advisor only knows about 10% of your worth, they won't advise investments that would require committing a large chunk of that to a single asset.

If the advisor thinks you only have a small amount to invest, it's harder for them to diversify your portfolio. They might recommend just 2-3 different investments, when you would actually do better with 5-6 (or even more), to balance your portfolio better.

Fees are often based on the size of the portfolio that the advisor is managing. So you're a more valuable customer if you have a larger portfolio being managed by the advisor, and you'll likely get better service.

All that said, it's entirely possible that what you may lose in net returns will be offset by what you save in advisor fees.

Answer 4

Financial advisors who are paid by a portion of funds under management (let's say 120bp) have access to financial instruments and services unavailable to the general retail investor.

To the extent that your financial advisor holds common stocks, ETFs, mutual funds, etc., nothing is stopping you from mirroring the advisor's actions on funds not under management.

However, a financial advisor has access to share classes in the institutional level, with large minimum trade quantities.

More important is the role of a "Manager of Managers". In this scenario your advisor works with Separate Account Managers (individual portfolio managers) who specialize in different aspects of the financial world. So, if the advisor thinks that XYZ Advisors has a good track record with a particular market sector and security type, the advisor opens an account with XYZ with pooled funds from the investments under advisement.

From Investopedia:

They determine an appropriate portfolio with allocations to various sectors and segments of the market. The manager of managers then hires a number of investment managers to manage assets in the various categories, investing portions of the pension funds assets with various investment managers. Funds can be allocated to multiple categories including money market funds, bond funds, and stock funds.

This is what investment managers do that is unavailable to retail investors. The Separate Account Managers do not accept non-institutional clients.

All of these relationships involve active management, and the management fees pile up. The key question is does what the Manager of Managers offer consistently outperform the indexes by substantially more than their advisory fees?