Why Should I Pay For Portfolio Management?

Chances are, if you are an investor, you have had to deal with the question of whether to manage your own investment portfolio or have it managed for you, in which case a monitoring fee will be charged by your adviser.

Monitoring fees are fees for information and advice given. Generally, monitoring fees range between 0.5% and 1.5% of the funds being managed, depending on the size of portfolio. These fees are generally tax deductible, which reduces the real cost. Fees usually cover not only advice but full quarterly or six monthly reporting showing portfolio valuations and performance, economic updates, and a tax report. If an investor does not wish to pay monitoring fees, advice can be given at an hourly rate. This often works out to be more expensive than the monitoring fee because the adviser has to spend time reviewing the value and performance of the portfolio before giving advice. With a managed portfolio, paperwork is usually kept to a minimum and changes to portfolios can be made at little or no cost.

Generally, the only "advisers" offering "free advice" are nothing more than salespeople who earn a commission on investments they sell. Commissions are paid for by investors indirectly in that without commissions, the return on the investment could be higher.

Advisers have up to date information on what is happening in investment markets. Their key role is to set the "asset allocation" for the portfolio and to review the investments that make up each allocation. There are only 4 types of investment (asset classes) which are cash, fixed interest, property and shares. With each asset class you have a choice as to whether you invest onshore or offshore. It has been shown that over 80% of the return on an investment portfolio is determined by the asset allocation, that is the percentage weighting of each asset class, onshore and offshore, in the portfolio.

The asset allocation for different investors will depend on a number of factors, such as their age, the size of their portfolio, their financial goals, how they feel about risk and volatility in their portfolio and various other factors. It is critically important that the asset allocation be set correctly. If it is set incorrectly, then the investor may have a portfolio that produces too low a return or has too much risk. A good adviser will spend time with clients getting a good understanding of their values, attitudes, lifestyle and goals before recommending a portfolio.

Another important part of the advising role is to support clients through market changes to ensure that any changes made to portfolios are consistent with the investment strategy, in other words, to avoid panic selling or buying of investments. Paying a small percentage of the portfolio return to an adviser in order to potentially increase return and/or reduce risk, along with the various other benefits makes good sense.