Courtesy of google.com
Recently, I sat down to tea with a longtime acquaintance. She wanted to talk about her broker. He’d earned money for her over the years, but she resented his fees each time she bought or sold a stock. She also wanted to reduce her taxes. To that end, she’d made an appointment with a money manager. Normally, a money manager operates differently from a broker. He or she doesn’t charge a fee for each transaction but levies an annual assessment based on the value of the portfolio, usually 1%.
I made a quick calculation in my head, assuming the woman had a million dollars in assets, which I imagined she did. A 1% fee on that sum comes to $10,000 year. I doubted she had paid as much annually on transaction fees. Nonetheless, I tried to provide some words of comfort.
“If you’re paying taxes on capital gains, at least you’ve been making money.”
My friend’s frown suggested I was being flippant, so I veered a little. “Warren Buffet told his wife to put her money in a mutual fund if he dies before her.” I went on to explain. If Mrs. Buffet put her money in fund tied to an index, like the DOW, NASDQ or Standard and Poor’s, the value of her portfolio would float up or down with the index. It’s considered a safe investment, with miniscule fees, and her money would never fall below the index. Of course, her money would never beat the index, either.
Money managers, like the one my friend was considering, are attracted to mutual funds, bonds and certificates of deposits as places to park money. These are passive investments that don’t invite much worry, either, because they don’t fluctuate like individual stocks, or because they accrue interest no matter what the market is doing. On the other hand, a broker, whose reputation rises and falls based upon the amount of money he makes or loses for his customers, does worry.
My friend dropped a lump of sugar into her tea as she considered what I’d said. “So you’d stick with your broker, then?”
“He’s not perfect,” I shrugged. “But yes. He’s grown my assets.”
My friend mused into the air above my head. “I suppose that’s true of mine.”
A moment later, she shared her broker’s name and I laughed. We had the same one. We valued him differently because our expectations were different.
The pro and con arguments surrounding active and passive investing depend on the individual. At play is not only one’s age but one’s tolerance for risk and individual goals. Paying taxes or fees shouldn’t be the defining issue. As for my broker, I feel he’s worth the price of his service.
