Individually Managed Portfolios Not Just for the Super Wealthy

Those of us who are older than our money remember the days when money managers required at least $1,000,000 before they would attempt to construct an individually managed portfolio of stocks and bonds for a client. The rest of us were left to manage on our own using a stockbroker or buying mutual funds. In fact, mutual funds were created to serve the bulk of investors not served by the money managers. Although mutual funds served this market fairly well, they could not provide the many advantages that individually managed portfolios offer:

  • Lower fees
  • Lower taxes
  • Less idle cash
  • Portfolios tailored to meet individual income, growth, and risk requirements
  • Professional asset allocation, ongoing oversight, and timely rebalancing

Fortunately, today many more people are able to take advantage of the benefits of individually managed portfolios. Technological advances have brought tremendous efficiencies to the business of money management, lowering costs and allowing managers to work profitably with portfolios much smaller than $1,000,000.

One of the most important technological changes has been the replacement of the physical delivery of securities with electronic delivery or �book entry� systems. Under the old system, Wall Street firms had a lock on the investment business because physical delivery of securities required a presence on Wall Street. The new book entry systems facilitated the emergence of independent custodians such as TD Waterhouse and Charles Schwab not tied to the large brokerage houses on Wall Street.

Independent custodians effectively unbundled research, trading, and custodial services and helped reduce total costs to all market participants. As a result, money managers no longer need to trade through the large Wall Street firms in return for research, delivery and custodial services. And they no longer need to pay their prices. Trading commissions that used to cost an investor $500 to $700 per trade have been whittled down to $25 or less.

Technological advances have also brought greater efficiencies and lower costs to the front office management of investment portfolios. With powerful PCs, new software, and the Internet, money managers have unparalleled access to news, data, real-time pricing, and instant credit research. This allows managers to monitor large numbers of securities without needing trading rooms staffed by hundreds of professional traders. In addition, electronic downloads of client portfolios into sophisticated management systems allows for real-time decision making at a fraction of the cost of 20 years ago.

At BWFA, we can construct individual portfolios for clients starting at $300,000. This minimum is set by both cost and diversification considerations. Modern portfolio theory suggests that a minimum of 40 stocks is needed to provide proper diversification. Buying more than 40 stocks tends to drive costs up without a corresponding decrease in risk. In addition, we believe the cost of a trade should not exceed .5%-1% of the value of the trade. Assuming transaction costs of $25 a trade, and $5,000 minimum purchase amounts for each stock to keep the cost at .5%, we can purchase 40 securities with a portfolio of $300,000.

This means that many more investors than ever before can acquire individually managed portfolios of stocks and bonds. And they can do so at far less than the cost of using mutual funds. Ongoing management fees of mutual funds average 1.42%. Despite advances in technology, mutual funds have not lowered these costs over the years. In fact, the average management fee for equity funds recently reached an all-time high of 1.6%. Experts, including Morningstar and the famed John Bogel of the Vanguard Group, have estimated the true cost of mutual funds at closer to 3% when you include other factors such as trading costs, the effect of uninvested money to honor redemptions, and higher tax consequences. At BWFA, we charge .75%-1.25% to construct and manage a portfolio of individual securities customized to your needs. These fees properly reflect the reduction in costs brought about by technology.

Tremendous advancements in technology have been good news for investors. Today we can offer many investors all the advantages of individually managed portfolios, including lower costs, lower taxes, and portfolios tailored to your individual needs. If you have $300,000 or more to invest, you should take a look at what an individually managed portfolio could offer you. By historical standards, these are truly bargain times in which to hire a professional money manager.