Investment management companies??

[widgeon13]

Are they good or just lucky?

I am retired and manage my own portfolio (when I retired I took a lump sum, not too confident about the long term prognosis for my employer). I wouldn't be adverse to having someone manage it (or a portion) if they had a good track record and would be willing to only charge a fee when they make money for the portfolio. I realize that their (investment firms) mission might well be to minimize any lose when the market goes south but paying when the portfolio goes down just doesn't make sense to me. The fees most charge are fine if one has 10+ million to invest, I suppose. Paying someone a .25% when my portfolio goes down is taking food out of my mouth.

"Pay me whether I am successful or not" is just not my bag. I suppose the best option for me would be a financial plan based on a one time fee and then execute myself.

Has anyone encountered a firm that charges only if they make a net profit above the starting principle value.

The idea sounds like it could be very successful in the investment community if someone was good at investment management and was willing to live off their skills and knowledge, not completely off the deep? pockets of the other guy. Risk reward, at least they would have some skin in the game. Right now all they want to do is use your money to play the game and when the market goes south they still get their pound of flesh.

I' not flaming the investment community but it just seems like doing it a different way could have some potential for success. It would also require a lower portfolio return to be successful since the individual is not paying when the market goes down.

Probably a crazy idea but since I have the time, crazy ideas don't cost me anything most of the time.

[jyl]

Traditional asset managers (long-only) charge some percentage of assets under management, from 0.50% to 1.5% depending on account size and asset type. This creates a fairly stable revenue stream, which is important since the expenses of running an asset mgmt firm are fairly fixed.

If revenue went to zero during market declines, the business model would be incredibly cyclical. Every few quarters the firm would have a quarter of no revenue and thus major losses. I can't think of a lot of industries where quarterly revenue goes literally to zero on a regular basis! To compensate for that level of risk, the fee charged in up markets would be much higher. Further, in a prolonged bear market - e.g. 2000-2003 - all firms using this model would go out of business.

You can see why not a lot of asset managers are interested in this business model.

Hedge funds usually charge 2.0% of assets under management plus 20% of gains above the portfolio's starting point. Their claim is that, since they go long and short and use derivatives, they can make money in any market, even bear markets. IMO, the claim is questionable and the fee too expensive, but some investors are willing to pay it.

[MRM]

Unless you have a lot of money or are unusually sophisitcated, there is no reason for you to chose a paid money manager over having your portfolio split into a S&P 500 index fund and some sort of bond ladder. I suggest not going to a broker or commissioned financial professional. Go to a certified financial planner who charges by the hour (good ones will be expensive but worth it) and then follow his direction.