A question we occasionally field from our most financially sophisticated potential clients is “Why would I not just do all of this myself”. In fact, we make it pretty easy for anyone to do exactly that. We not only publish our asset allocations and the ETFs we use but also document, in detail, our exact rebalancing policy. Anyone, especially a sophisticated investor, can simply copy any of our asset allocations use the same ETFs (or even pick their own) and then use a cheap broker to do all of this themselves. Actually, we all tend to find huge satisfaction in a sense we have control over any outcome. So why would you consider handing over this control to anyone? The counter-argument is incredibly simple and lies in just 3 key facts we like to highlight:
We work incredibly hard to make our fees completely transparent. Our annual management fee is fixed at 0.5% or 0.3% based on your assets under management. This fee includes the portfolio management (rebalances, ETF selection and monitoring), custody and reporting. Therefore, regardless if your portfolio is rebalanced only once or one thousand times, you do not bare any explicit brokerage costs for any trading that occurs. So how would this compare to using a cheap online broker?
There are thousands of brokers all over Europe and all have their own charging structure.
In order to do a fair comparison we have selected one of the cheapest brokers in the UK. They have a custody fee (holding your assets) of 0.1% and charge £6 for every trade you do on an ETF. So if we took a standard 60% Bonds, 40% Equity portfolio and assume that we rebalanced twice per year (an unfair comparison as we actually rebalance more frequently for portfolios above GBP/USD/EUR 25K). We also prudently assume that you don’t have to or decide not to rebalance all of the assets within your portfolio if you had to do it yourself (assuming rebalancing only 4 of the 7 holding in our asset allocation). The numbers reveal some interesting facts:
|Portfolio size||Construction||Rebalance||Custody||Total||Our fee||ETFmatic Wins|
|0 - 1000||42||48||48||138||0 - 5|
|1000 - 10,000||42||48||48||138||5 - 50|
|10,000 - 46,000||42||48||48||138||50 - 138|
|46,000 - 90,000||42||48||48 - 90||138 - 180||138 - 270|
|90,000 - 200,000||42||48||90 - 200||180 - 290||270 - 600|
An ETFmatic portfolio is more cost effective at every assets under management band. However, a breakeven point is reached at a portfolio size of 46K whereafter it becomes more expensive. This then neatly ties into our second argument...
If money is a fungible resource, time is without question a non-renewable one. How long would it take to construct your portfolio yourself? Monitor it constantly, rebalance whenever it breaches your tolerance bands (having to do the calculations in excel) and decide to swap out one ETF for another when the tracking error increases.
If we made an exceptionally prudent assumption that you dedicated just 1 hour every month to following your portfolio that would result in 12 hours a year. How much would these 12 hours be worth to you? Let’s just say that you could be earning the UK minimum wage instead (the lowest opportunity cost and the least amount you could be paid to do something else). That 12 hours at £7.50 results in £90 pounds in lost income. This further complicates the argument in just how much are your sacrificing in both the renewable and nonrenewable resources in your life (money and time) in order to be in control.
|Portfolio size||Construction||Rebalance||Custody||Time||Total||Our fee||ETFmatic Wins|
|0 - 1000||42||48||48||90||228||0 - 5|
|1000 - 10,000||42||48||48||90||228||5 - 50|
|10,000 - 46,000||42||48||48||90||228||50 - 138|
|46,000 - 90,000||42||48-90||90||90||228 - 270||138 - 270|
|90,000 - 200,000||42||48||90-200||90||270 - 380||270 - 600|
If we factor in time the breakeven point goes up to 90K, becoming more expensive at portfolios above this size. However we would strongly argue that once your assets under management reach these levels, you will most likely not be using minimum wage to value your time. In fact far from it. The question to therefore ask yourself is what number would you assign to value your non-renewable resource?
It almost seems like there could be no arguments, yet we know that many sophisticated investors have strong investment views on certain asset classes and enjoy picking the securities themselves occasionally. Which ties into our third argument...
As many investors know, asset allocation drives the vast majority of a portfolio returns. Therefore as an investor you want to ideally ensure that the asset allocation you select meets your long term investment objectives. We would argue that the chances of outperforming the market is statistically very small and very few professional stock pickers have consistently beaten the market. No doubt many of our clients enjoy building and monitoring their portfolios. However that’s exactly what we offer them with our three portfolio management styles. The ability to build a truly bespoke asset allocation.
These are the three points we make to our sophisticated potential clients. We offer them the ability to save time and money whilst giving them the freedom to build the exact asset allocation they really want.
Almost literally having their cake and eating it too.