Should you hire an investment professional to help manage your wealth? What types of investment professionals are out there? What advantages and disadvantages may exist for investors in paying for an investment professional’s services?
All that and more in Episode 34 on the Wilson Wealth Management YouTube channel.
“What are the common types of investment professionals?”
The three professionals that individual investors usually encounter are asset managers, research analysts, and investment advisors.
Asset managers make the investment decisions. Whether that be in an investment fund or a discretionary portfolio. As an investor, you decide on the manager and then let them make all the portfolio decisions. Your only input is to invest or divest in the portfolio itself.
Research analysts review investments and recommend them for inclusion (or exclusion) in a portfolio. You may see them in fund rating services, such as Morningstar. In Yahoo Finance and other investment news aggregators. Provided by your investment broker as potential investments. You may even subscribe to analysts for proprietary information and recommendations.
Investment advisors tend to the be the actual professionals you will deal with on a regular basis. That may be a commission salesperson or bank employee. Where you receive “free” advice. It may be an advisor who charges an annual percent fee based on assets. Or, it could be a fee-only advisor. Who charges hourly or flat fees based on the services rendered.
For a refresher on investment advisor compensation models, please refer to “Episode 22: Advisor Compensation” or read “Commission Based Advisors: Part 1”, “Commission Based Advisors: Part 2”, and “Fee-Only Financial Advisors”.
“What are the potential advantages in working with a professional?”
There are a few typically cited.
One, a professional should have strong technical expertise. Much more than most individual investors.
Two, depending on the professional, he/she may have many years of investing experience.
Three, the professionals will have access to better analytical tools and data.
Four, it is their job. If you are a doctor, engineer, teacher, etc., you work a full day in your field. Hard to compete with a professional who is analyzing investments and strategies full-time. While you are devoting an hour or two an evening.
So, many potential advantages in working with an investment professional.
“What about potential disadvantages?”
Yes, a few of those as well.
One, as in any profession, some are better and some are worse. You need to do proper due diligence on to find a competent professional.
For a refresher on assessing potential advisors, please refer to “Episode 19: Advisor Qualifications”, “Episode 20: Advisor Experience”, and “Episode 21: Advisor Fit and Offering”.
Two, professionals may not cover niche or neglected markets. If the professional you rely on is an expert in US large-cap equities, will they have any skills in the Western Canadian junior mining sector? Swiss small-cap domestic markets? High yield bonds? An amateur investor with expertise in niche markets may do a better job than a generalist professional.
Three, investment professionals are not free. Usually, not even inexpensive. Even that “free” advice from a fund salesperson or bank employee has fees embedded in the annual product costs. Are you getting value from the asset manager, research analyst, or investment advisor?
Four, tied in with point three, is there added value for the cost? If the asset manager charges you 1.0% per year, does he/she generate at least 1.1%? That is the key issue with investment professionals. Does active asset management provide excess returns over the cost paid by investors?
This latter issue is the age old, “Active versus Passive Management” debate. Not surprisingly, that will be the next issue we delve into.
If you prefer to read, rather than listen, to this topic, please check out, “Investment Professionals”. You may also learn a little more with “Should You Follow the Pros?” and “Do Analysts Provide Positive Returns?”.
