2006 Lane Reports

Why Choose a Professional to Manage Your Assets? The Answer - DISCIPLINE

Saturday, April 1, 2006
by J. Brad Strom, CFA

In recent years, professional asset managers have enjoyed a renewed sense of credibility. Gone are the days when individual investors could simply buy any company's stock with a dot-com suffix and the mere promise of “future” earnings, and expect double - or triple - digit gains. Add to that individual investors' tendency to let emotions drive their decision making, their more limited access to information, analytical tools, and time to devote to analysis, and you will no doubt agree that hiring a professional money manager is definitely worth considering.

Contrary to conventional late - 1990's wisdom, the time-tested financial yardsticks used in fundamental securities analysis for evaluating corporate viability and determining valuation targets (examining issues such as growth and quality of earnings, just to name a few) really do have merit. Investors are returning to the realization that risk management through portfolio diversification and strategic asset allocation (managing the mix of stocks, bonds, cash, etc.) over time produces superior risk-adjusted returns. That having been said, how do you determine whether or not you are a good candidate to have your financial assets professionally managed? And, just what exactly does a professional money manager or registered investment advisor really bring to the table?

If your and your spouse's cash and securities accounts (trusts, IRAs, etc.), when looked at in aggregate, have marketable securities in excess of $500,000 and you do not have the time or inclination to make your own “specific” investment decisions, you are an ideal candidate for professional asset management. Registered investment advisors such as Marc J. Lane Investment Management, Inc., offer asset management services to both institutions and individuals for a fee that is calculated as a percentage of assets managed.

Of all the benefits associated with hiring a professional asset manager, one overwhelming factor stands out. These professionals bring a degree of objectivity and discipline to the decision-making process -- in managing overall portfolio asset allocation and specific industry and individual security risk -- not often found in “self-managed” portfolios.

For some investors, particularly those with assets of less than $500,000, mutual funds may present a reasonable alternative. For an annual expense ratio and a front or back-end sales charge (load), you can achieve an adequate level of diversification in both stocks and bonds. However, once your assets are at or above the $500,000 level, your holdings are certainly large enough to consider hiring a professional asset manager.

Unlike mutual funds, professional money managers like Marc J. Lane Investment Management, Inc. will custom-tailor a portfolio of individual stock and bond holdings to suit your particular investment needs and risk profile, including specific tax considerations, rather than the generalized needs of a wide range of fund investors. They essentially build you your own mutual fund, and act as your personal financial advisor as well.

While you might expect to pay a much higher fee for this type of service, the reality is that the fee is often actually lower. For example a $1,000,000 professionally managed portfolio would typically incur a 1% annual charge, while the average stock mutual fund has expense ratios between 1.25% and 1.50%, often in addition to a front or back-end sales charge.

What's more, professional managers work closely with your attorney and accountant to help you achieve your financial goals. When this higher level of service associated with a managed account is considered, the fee is quite modest. Whereas, mutual funds usually make year-end capital gain distributions that are taxable to each investor whether or not any profit was made on his or her original investment.

While the service given, and the cost at which it is provided, are crucial factors in deciding whether or not to utilize a professional advisor, perhaps of even greater benefit is the professional's ability to direct you toward -- and help you maintain -- an “appropriate” long-term asset allocation strategy which reflects your individual tax planning. Academic studies have shown that when using a fully diversified portfolio, roughly 90% of your total return is a function of how effectively your assets are allocated. In other words, if your portfolio is either over weighted or under weighted in stocks over a long period of time, it could cost you much more in terms of total return than any other single factor.

For example, if your individual financial goals, risk tolerance, time horizon, liquidity needs and income requirements indicate an appropriate allocation of 60%-70% in stock holdings --but over the last ten years you only allotted 40% to that asset class -- even taking into consideration the poor stock market performance of the 2000 through 2002 period, your total return over that ten-year time frame would have been dramatically reduced. Moreover, by strictly adhering to an appropriate long-term asset allocation strategy, you are able to maximize your portfolio return while successfully managing your risk.

Let's assume that your “target” allocation is 60%-70% in stocks, and you currently hold a 65% position. Let's also assume that over a period of time (the time period will vary depending upon market volatility), stocks decline relative to your bond holdings for the period, bringing their weight below the target minimum of 60%, to only 55%. A strategic asset allocation strategy would prompt your advisor to reallocate your portfolio by purchasing more stock from cash holdings or selling bond holdings to fund stock purchases, bringing your weighting in stocks back up to 65% of your total portfolio, thus effectively “buying low.” The opposite would be true of a strong stock market where equity positions would be sold to bring the allocation to that asset class back down to 65%. By doing this consistently over time, your portfolio will benefit from “buying low and selling high” over and over again.

Having the discipline to adhere to a well thought-out, tax-efficient asset allocation strategy over time is probably the single most important aspect of a successful investment plan. Utilizing the services of a professional money manager like Marc J. Lane Investment Management, Inc. removes emotional factors such as fear and greed from the decision-making process, imposing discipline on that process. Many individual investors tend to focus solely on total return without considering the degree of risk imbedded in their portfolios. Advisors “actively” manage the degree of portfolio exposure between and within each specific asset class (stocks, bonds, etc.), equity sector (large-cap, small-cap, international, emerging markets, etc.), industry sector, and individual security, in an intentional, objective fashion.

So, in answer to the question, just what exactly does a professional money manager really bring to the table? I would offer the following. First and foremost, professional advisors bring “disciplined rational decision-making” to what is too often an emotional process. They also bring a level of customer service not available outside the world of professional asset management. And, finally, professional managers like Marc J. Lane Investment Management, Inc. can provide all these benefits at or below the cost that most mutual funds charge. All things considered, I believe the case for professional money management is a strong one.


J. Brad Strom, CFA is a Senior Vice President and a Portfolio Manager at Marc J. Lane Investment Management, Inc., the registered investment advisory affiliate of The Law Offices of Marc J. Lane, a Professional Corporation. Mr. Strom earned his Master's degree in Finance from DePaul University's Graduate School of Business in 1993 and his Chartered Financial Analyst designation in 1994. He is a member of the Investment Analysts Society of Chicago.



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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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