For the sake of discussion, let’s say your favorite charity has an endowment of $5 million. You’ve likely got a finance committee and a paid manager for the portfolio. In most cases, your performance is probably okay and you don’t harbor any strong dissatisfaction with the current arrangement.
Still, there is an ongoing duty to invest wisely and safely and to exercise proper supervision over the funds. Also, the current economic climate demands maximum effectiveness for every resource used by the organization.
The crux of the matter is this: every 1% of investment return brings $50,000 to your bottom line. Boost the returns and you boost the organization’s mission. More money for scholarships, services or other community support. (For more, see: Fee Wars: Money Management Giants Slash Prices.)
The most obvious solution is higher investment returns. If the manager would choose better stocks or bonds or mutual funds of stocks or bonds, the resulting performance should create additional funds. If they can’t do that, maybe you should seek a new manager or managers.
That solution is uber obvious and that is where most boards go. And, for the record, it is also where many investment professionals go too. Banks advisors, brokers and consultants make claims and support those claims with believable documentation. Most will send out a team of sparkling professionals who are charming, articulate and knowledgeable.
But that solution is problematic too. They all look good. And they all sound convincing. But this is the serious flaw most advisors won’t touch - no one (and I mean absolutely no one) can predict the future. All those groups with all their experts are merely guessing about the investment future. From this standpoint, the notion of adding an extra 1% through better investing is highly speculative.
Less Obvious Solution
There is another way that offers a sure fire performance boost. If you take the existing investment pool and slash fees for trading, mutual funds, portfolio management or custodial services, that savings will flow directly to your bottom line. (For more, from this author, see: How to Create a Low-Risk, High-Return Portfolio.)
Want to boost portfolio returns by $5,000? Find a safe and insured custodian who won’t charge high fees to hold investments and provide verified statements. Need another $5,000? Find a way to shift some portion of the portfolio to low-cost index or institutional-share managers.
There is no need to sacrifice performance either. First, many existing managers will discount fees if pushed. But even if they won’t, there are hundreds of quality companies who will. The independent research firm Morningstar tracks thousands of managers and compares performance against peers across various time frames. It’s fast and easy to find the top performer in any asset class. Morningstar also identifies fees and costs for each manager, so choosing a top-flight manager with value-oriented pricing is simple. With a hundred data points for each manager or fund, screening for quality and value is relatively simple.
Consider the ease to choose top-performing managers for each portfolio segment. For necessary diversity, you might choose lower-cost managers in American stocks, foreign stocks, emerging markets, real estate, commodities and several classes of bonds. There is no need to sacrifice performance in your quest to reduce costs.
Importantly, the returns from slashing costs are permanent. Unlike chasing investment performance, price reductions bring an increased return to the bottom line in each subsequent year. The present value of savings can be substantial.
The Right Approach
So why haven’t you considered this idea before now? The simplest response is that fees are nearly invisible when times are good. Rising markets and general prosperity obscure a lot of sloppy practices. No one worries about an extra half percent when returns are 10-12% each year.
But the queasy combination of low bond returns and economic uncertainty change all that. Factor in the Department's of Labor new Fiduciary Rule (effective June 9, 2017) and other calls for fee transparency. Ultimately, lower investment costs are readily available today for anyone seeking them.
There is no magic bullet for higher performance. And there is no crystal ball about likely investment returns in coming years. But there is a safe, reliable and convenient way to boost returns and mission success. You can lower investment costs without any speculation. You can allow cost savings to create new dollars for your mission. (For more, see: DOL Fiduciary Rule Explained as of June 9th, 2017.)