There was an interview HERE with Rick Ferri who is the CEO of an index-fund centric investment advisory firm located in US. It appears his firm only specializes in investment and nothing else. So in a sense, it is almost like a asset management house except it talks directly with investors. In the interview there were two interesting points he mentioned.

“We lost a few clients last year, not because of our strategy, but because they hit their “limit.” It wasn’t many clients—about 30 out of 500—but they just called up and liquidated their accounts. When we asked them why, they told us that they just couldn’t take it anymore. They had had all they could handle and were selling out. What’s unfortunate is that they were selling out at the worst possible time.” - Rick

My comments:

1. The equity market has mostly recovered and even exceeded the pre-lehman crisis level. It only took one year for this to happen. Advisers who tell their clients to buy and hold would have definitely lost some clients in the process because buy and hold is on the surface silly and seemingly lack of skill. Advisers who wanted to demonstrate their “skill” have to tell their clients to time the market by getting out of the market last year but their clients would have missed the massive bull run from March this year. Yeah, advisers who appeared to be timing the market and “appeared” to be doing their job & hence get to keep their job would have done their clients a great disfavor by doing so. Therefore, majority of the advisers will time the market to “show” that they are doing their job but actually clients are better off not to do so.

2. Regardless of how good advisers are, it is of no use if clients are not well educated in finance. At the end of the day it is the client who is the boss. Hence, you end up in the situation in which the advice goes unheeded because the client pulls the plug exactly at the wrong time. The lesson? It is impossible to outsource everything to the adviser. It is utmost important for the client to educate himself.

“We charge fixed fees of $2,000/year for up to $800,000 in assets under management. Then, we charge 0.25 percent of assets. But we’re only doing asset management. We’ll sit down with a client, discuss what their portfolio looks like, implement that portfolio and manage it. That’s it. That kind of service shouldn’t cost more than 0.50 percent per year. If an adviser is doing other things—detailed financial planning, insurance work, taxes, etc.—maybe they can charge more. But I personally don’t see how that is related to asset management, so why is it part of the asset management fee? My opinion is that there should be an asset management fee and then a fixed fee or hourly fee for those other services.” - Rick

My comment: In Singapore’s context, clients don’t want to pay a single cent in anything and in fact wants free gifts and love to take advantage of promotion etc. So advisers have to embed these cost and fees into the product. Amazingly this way of doing actually earns more for the advisers than a transparent fee structure. The lesson? In Singapore, clients think they are smart getting free advice and free gifts but actually they are just fools being ripped off by paying for extremely high cost products.