The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Chapter 17

Working with Money Managers

I'm more interested in the return of my money than in the return on my money.

—Mark Twain

Working with money managers¹ is the aspect of the investment process that is usually the most interesting for investors, but that all too often adds least to the growth of investor wealth. In fact, one of the principal methods of identifying investors who will encounter little success over time is to observe those who are most obsessed with money managers.

The reason that money managers typically subtract value from, rather than add value to, the investment process is not that money managers are incompetent, but that their services are, on the whole, overpriced relative to the value they bring to their customers. In the asset classes that matter most to investors—U.S. large- and mid-cap stocks and bonds—most managers will underperform over time by at least an amount equal to their fees and trading costs, to say nothing of taxes. In the more complex and obscure asset classes, where useful information is difficult to come by, talented and hardworking managers may modestly add value net of all costs.

The main reason investors spend so much time and emotional energy on working with managers, despite the modest-to-negative return we are likely to receive for our efforts, is that money managers are actual human beings, whereas almost all other aspects of the investment process are purely intellectual. It's a lot more fun and a lot more interesting to spend ...