Asset management-is it a ripoff?

[Narkos]

My parents recently sent me a an e-mail concerning some changes their asset managers were making to their portfolio. They pay a pretty hefty price for this service, but from what I can tell, they're just shuffling around various mutual funds. And this for thousands of greenbacks a year! Anyways, what do you guys make of this:



Decreased
PIMCO Commodity Real Return
Commodities

Added
Vanguard REIT Index
Real Estate

Decreased
Fidelity U.S. Bond Index
Intermediate Bonds

Increased
PIMCO High Yield
High Yield Bonds

Deleted
Managers Special Equity
Small-Blend

Reduced
Vanguard Growth Index Fund
Large-Growth

Increased
Vanguard Small-Cap Index Fund
Small-Blend

Increased
Fidelity Total Stock Index
Large-Blend

Deleted
Oakmark International
Foreign Large-Value

Increased
Vanguard Total Int'l Stock Index
Foreign Large -Blend

[cloudbase]

1. That appears to be a reasonably diversified portfolio.

I would hold commodities, as I think we're going to see a long bull market in commodities. I reduced my REIT position last year, and I don't think the real estate market has hit the bottom yet. Of course, that REIT may deal in certain areas of the real estate market, so their advisor may see gains to be had.

I personally think that PIMCO is a well run operation.

This was told to me last week by one of my investment gurus who I worked with on a Taft-Hartley plan some years ago: Obama or McCain win in November, markets up. Clinton wins, markets down.

Take it FWIW.

ETA: As to the rip-off aspect, I'd say it depends on how the account is structured. If the fund manager takes only a reasonable percentage of assets under management, then that's okay. Percentages generally vary depending on the value of the account. If they're being charged for each trade, then the rip-off potential is quite high, and the manager will bear watching.

[Narkos]

2. Thanks for the informative reply!

Not sure about the rip-off aspect, it just seems like a lot of money for questionable gains, but I don't know all the details. Thanks again!

[Captain Angry]

3. If the market goes down 10% and the managed portfolio only went down 5%...

Sounds like somebody earned their money.

You can't win all the time. If you could, we'd all be billionaires. Depending on the manager's strategy, they have methods of trying to beat the index returns. Some are successful, some are not.

What would the return on the original portfolio have been if it were not managed, and were invested directly into an index fund? It might not have been very nice at all.

The manager has probably provided a very in depth report on the methods used, and the gains made. See if you can get that rather than just the short version you have posted. It might answer all of your questions.

[Narkos]

4. You're right, although I don't have the info on their performance

my understanding is that overall, managed funds generally don't beat the market on average. I've pretty much transitioned to indexing. I take it you're not a fan of index funds?

[Captain Angry]

5. I'm not taking a stance.

Study after study shows that over a long investment horizon, that index funds do well. There are downtimes, there are up times.

It's the fund manager's job to protect the funds so that they are protected from falls, and benefit from gains. Or, that manager can say I am forgoing expenditures on protection to attempt to bring in a higher return than the index they've chosen to beat.

If I'm a bond manager, and I have built a portfolio that is very averse to increases in interest rates, I'm looking somewhat smart recently. But, if I am not paying attention, when interest rates start going back up, I'm going to lose monster money, my job and my reputation.

Managed funds that don't meet or beat the market are probably losing that extra gain by spending to protect from a downside (i.e. they're hedging). It's all about standard deviation. If you have a higher potential of gain/loss, there are more opportunities to profit than if your standard deviation is very small (like on a T-bill). You'll never have major profit on the T-bill, but you'll know precisely what you're going to get. The portfolio may go up, it may go down. How well is it structured to benefit from changing market conditions? Etc.

[gravity]

6. It depends on the fees they are charge for the service

Those mutual funds seem rather safe and I wouldn't be too concerned about those holding.

A financial adviser to pick out a good plan is a very smart thing to do because they can pick out safer investment plans than most people will do on your on. The riskiest thing is not knowing what you are doing, so a lot of times it is worth paying money to someone who knows what they are doing.

Now if it costs money to actively shuffle your assets around each year, you might be paying more than you need to. While some asset managers might be able to bring excess returns, it usually isn't worth it once the fees are piled on.

I would recommend just selecting a good portfolio of mutual funds, and just keep contributing to that. Don't worry about shuffling stuff around, because it usually isn't worth it if you have selected a good plan to begin with.

[Narkos]

7. Thanks to all for the great replies!

I learn a lot from you guys. Thanks again.