First off, using a wealth manager is almost always better than not investing.
… but with a few hours each year you can replace and outperform them.
Often wealth managers spend more time building client relationships than actually managing money.
Wealth managers usually charge one or two percent each year. It doesn’t seem like much… but it compounds. The “small” one or two percent over a lifetime can reduce your wealth by hundreds of thousands of dollars.
Many advisors and wealth managers are also compensated by pushing funds and insurance on clients. But usually better options are available.
Advisors don’t uphold their fiduciary responsibility. In other words, their interest is partially misaligned with clients.
A long-time friend had his retirement account “professionally” managed by an investment advisor. Let’s look at how it performed compared to a simple strategy he could have used instead. It would have taken less than an hour each year.
The simple strategy is buying into a low cost fund every month that tracks the S&P 500 (500 large companies). For simplicity, let’s say each month he contributed $200 to his investment account for 40 years. Each month the $200 would go into the fund tracking the S&P 500. The process could even be automated.
Over the 40 years the simple strategy would have returned on average 7% annually… While his professionally managed account returned only 4.5% annually after fees.
A difference of 3.5% doesn’t seem like much but the chart below shows what happens over time…
The difference amounts to $256 thousand… The amount lost out on went to the wealth manager and other expensive funds that he recommended.
This real example is not an anomaly. A plethora of back testing and research shows wealth managers underperform on average.
Learning to manage your investments is well worth the time.