Pity the poor private client – well poor is probably the wrong word, but apparently the wealthy are getting a bum deal from many of the advisers and private banks that look after their money.
They pay the highest fees and get the worst performance, according to Alan Miller, former chief investment officer at New Star Asset Management and now partner at Spencer-Churchill Miller, a wealth management boutique.
Mr Miller has seen the light and is using low cost exchange traded funds to build portfolios for clients, as he explains in a video interview. He says making asset allocation calls is the key to making money, rather than picking stocks.
Keeping costs low is important too, and Mr Miller rails at the hidden costs fund investors pay. The so-called total expense ratio is nothing of the sort; it is just the tip of the iceberg, he says. There is the cost of dealing, the bid-offer spread, commission, marketing, etc, etc.
Research in the US has shown that, if you take out the market effect from fund performance and work out what you are paying for the active stock picking, it is an eye-popping 4-5 per cent a year. The costs are not spelt out, but are reflected in performance figures, says Mr Miller.
No wonder so few active managers outperform.
Investing via ETFs is much more cost efficient, Mr Miller says. The annual management charge is the same as the TER (with funds, the TER is typically higher than the AMC, sometimes significantly higher); spreads on the big ETFs following mainstream indices are pretty low; and dealing costs are tiny – zero for electonic dealing and 0.05 per cent otherwise, because it is not bundled in with the cost of research, which Mr Miller says he neither needs nor wants.
Mr Miller does add back some costs, charging 0.75 per cent a year for his advice, plus a performance fee of 5 per cent. Still, if he gets his calls right, clients may think they are getting a good deal.
One advantage (for Mr Miller) of using ETFs is that there are few capacity limits. So he can take on lots of clients to boost fees without running the risk of sacrificing performance. His experience as an active manager taught him that good performance generally leads to getting loaded down with too much money, or too many different types of mandate.
Mr Miller may have discovered a winning combination: a nice little earner for himself (and partners) and perhaps a better deal for private clients used to paying a lot for a little.