6. Is the SMA cost justified?
This stewardship question is important. The answer varies by investor. The resourceful do-it-yourself investor could cut the costs from 200-300 bps to less than 50 bps by creating a diversified portfolio and managing it through a discount broker. However, two key factors are appropriate to consider:
- Performance – an investment advisor / broker can often improve investment performance. For example, an oft-cited study of investors by Dalbar, a research firm, showed that the average mutual fund return was 7-9%, a little below the major market averages, possibly reflecting the mutual fund management cost. However, the average mutual fund investor earned less than 5%. Some believe this lower return results from two tendencies of do-it-yourself investors: (1) shift to the funds / securities that recently performed best, and (2) sell out at bottoms because of the fear of even greater losses. A good advisor can help offset these lack-of-discipline tendencies, easily covering the common 50-100 bps advisory fee.
- Time Commitment. Resourceful investors can do values based research on companies, create a diversified portfolio, monitor the many variables affecting performance, develop the discipline to overcome the three factors that drive stock prices (greed, fear and the urge to get even) and buy good performance reporting software. However, for most investors, the commitment of time and money exceeds the expected value.
In addition, a good advisor or manager can assist Christians by providing introductions to and oversight of financial services, such as accounting, estate planning and insurance.
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