Now that we've nailed the first assumption of financial services - that your wealth requires a special relationhip with a broker - it's time to discuss the second - that your wealth justifies specially customized financial products.
There are certainly cases where customized financial solutions make sense. If you own a concentrated position in a (perhaps restricted) stock, for example, a financial advisor could design an option strategy to help limit risk. Or your money manager could provide access to hedge funds and other alternative investments. However, the contention that the core (and majority) of your investment portfolio requires sophisticated advice and customized products is totally invalid.
Put simply, execution of an asset allocation plan is no harder, and requires no more customization, for a fifty million dollar account than for a fifty thousand dollar account. Take another look at the core portfolio presented earlier and you'll see that it consists of fewer than 10 ETFs. Yet it provided greater diversification and ease of management than any portfolio filled with individual stocks and bonds. Even expanding the core portfolio to emerging market stocks by using discounted closed-end funds would add only another 6 or so funds. An online brokerage account with a total of, say, 15 funds (ETFs and closed-end) is simple to manage, track, rebalance, and harvest for tax losses, even if the assets total fifty million dollars or more.
At a more fundamental level, wealthy investors should question the traditional segmentation of the financial industry: that commodity products are for the mass market, and tailored products are for the wealthy. In fact, commoditization of financial products is your friend. You should try to find commodity products rather than tailored products, as greater competition drives down fees.
Think of it this way. I’ve suggested that most investors could greatly increase their performance by buying and managing a portfolio of ETFs in an online brokerage account. The markets for ETFs and online brokerage services are fiercely competitive. Due to competition, the price of online trading has been driven down relentlessly over the last five years, while the functionality and quality of online brokerage services has steadily improved. That competition is now spreading to online banking, and for consumers it should mean better interest rates and functionality.
The market for ETFs is similarly intense, given the ease of selecting and purchasing one ETF over another. (In other words, switching costs are far lower for ETFs than, for example, for mutual funds.) So it’s no surprise that the fees on ETFs are falling as competition heats up, and an S&P 500 ETF now has the lowest annual expense ratio of any fund that I know of. (It’s IVV, which has an expense ratio of 0.09%, and is included in the core portfolio mentioned earlier.) In contrast, fees have risen recently for mutual funds, managed accounts and wrap accounts, for which competition is less intense.
Should you be concerned about moving the majority of your $5 million, $10 million or $50 million portfolio from a full service brokerage to an online broker, when the online broker is fighting it out in the market for $10,000 accounts by offering the lowest online trading fees and the highest interest rates? Should you be concerned about shutting down your “managed account” and moving your assets to ETFs? I don’t think so. In principle, you should embrace products in the most competitive and commoditized markets, as they are better and cheaper than those in less efficient markets.
Look at it this way. I guess that even if you're extremely wealthy you don't buy specially hand-tailored underpants. After all, the commodity underwear business produces superb products at low prices. So why buy specially tailored investment products in an equally efficient and commoditized market? In fact, the argument against it is even stronger: if you get satisfaction from buying hand-tailored underwear for exorbitant prices it may be worth it to you. But since investing is all about generating returns and fees come out of returns, it's totally non-sensical to buy tailored products that in aggregate fail to beat the market and incur higher fees. Exactly how much higher those fees really are is the subject of the next chapter.