Why Investment Management Isn’t Just for the Wealthy Anymore

There has always been the notion that investment management is something reserved for multimillionaires, those who spend their summers in the Hamptons and have accountants on speed dial. Partially, that’s been true. Investment management was provided at high minimums, percentage-based fees, and with such exclusivity, it prevented regular earners from stepping off the sidelines.

Yet over the last ten years, a great deal has changed. Due to advancements in technology, reduced obstacles, and a competitive landscape, the financial services industry has come to find that investment management is ideal for not as many trust fund babies but everyday people attempting to build retirement accounts and figure out what to do with savings. What’s no longer the issue is receiving access to such investment management; what’s at stake is whether it makes sense for your situation.

What is Investment Management?

Before pinpointing who benefits, it’s important to assess what we’re working with. Investment management is not just selecting stocks, it’s overseeing an investment portfolio for optimal growth under specific conditions.

Investment management often includes determining how much money to allocate where across different asset types, choosing precise investment instruments within those asset types, monitoring how each investment performs over time, rebalancing investments as necessary and adjusting annual strategies as life changes over time. Some investment managers will even provide tax-loss harvesting come April.

So, there are specific choices made with a goal in mind instead of avoiding setting something up and hoping for the best. And truthfully, most people don’t have the time, resources, patience, or knowledge to do this right on their own, even when they think they can.

What Changed to Make Investment Management More Accessible?

A few things happened at once that opened the floodgates. First came the advent of robo-advisors who automated many basic portfolio management tasks to create a much cheaper solution. Investment management that once cost a fortune was now computerized.

Then, traditional advisory firms realized that they were losing clients to these more automated platforms and began lowering their minimums. For example, hedge funds once required an average of $500,000 minimum to establish a relationship; now, many firms work with investors who have $50,000 or even $25,000 or less.

For those who live in regions where competitive financial services are available, options like investment management winter park offer once-exclusive resources to the masses with much more reduced barriers.

Additionally, fee structures have changed. Where firms previously charged 1.5% or 2% annually for investment management across the board, especially when managing large accounts, now, most clients see competitive fees of under 1%. When an investment manager is working with $100,000, 2% versus 0.75% is a lot of money over time.

Who Benefits from Professional Investment Management?

There’s no black-and-white answer based on dollar amounts. For example, a novice investor with $30,000 who is overwhelmed by the process may do better than an experienced investor with $300,000 who enjoys thorough research and understands market machinations.

That said, there are specific situations where professional management makes more sense. High-earning professionals who can afford to give up time spent managing personal portfolios but don’t have time to spare benefit, doctors, lawyers or business owners who want to spend their free time doing literally anything else. There comes a point of opportunity cost when spending ten hours a month researching investments costs more than the fee for a manager.

Furthermore, anyone getting close to retirement benefits from professional management. The stakes get higher when one transitions from accumulating assets to withdrawing them and decisions about when to collect Social Security and how withdrawals should be used makes any strategy adjustment worthwhile for how long money will last.

Lastly is someone who understands their psychological tendencies and knows they make poor decisions when fear gets involved during bear markets or greed during bull markets. If you’ve ever panic-sold in March 2020 or your stockpile of cash sat on the sidelines for too long waiting for just the right moment to buy low only for it never to happen, having someone else at the helm may diminish non-productive mistakes that would take years of gains away.

What Are the Costs of Going It Alone?

For many people starting down the path of DIY investments, it appears cheaper because there’s no fee paid to an advisor. However, that’s not necessarily true due to hidden costs that aren’t reflected on any investment statement.

First are opportunity costs, the time one spends researching and monitoring investments equates to dollar amounts. If you’re spending three hours a week on this instead of working or spending time with family or truly enjoying life instead of doing this part-time on the side but making side salary, how much is that worth?

Second is cost of error. Buying high and selling low because you got scared. Not putting your money to work and leaving too much cash sitting on the sidelines waiting for when you think you should invest. Forgetting about rebalancing until it’s already way too far out of alignment; understanding tax consequences of investment instruments because you’ve failed, over time these errors add up, and for many people far exceed management costs.

Finally comes knowledge divergence, the Dunning-Kruger effect reigns supreme when it comes to personal finance; those who know least about investing believe they know most. For professional managers who handle market mechanics, tax law and portfolio theory all day as part of their job (and not as a hobby), they have critical thinking skills and insights that can minimize doubt.

When Does DIY Make Sense?

Not everyone needs professional management all the time. If you’re just getting started with nominal funds and equity positions and you’re young enough that any mistakes won’t derail your long-term goal projections, a simple target-date fund or basic index fund portfolio may be perfectly adequate.

In addition, those who enjoy investing, with empirical experience and a methodology proven through various cycles, may not need outside help anymore either, with proper discipline through recessionary years like in 2008 or in 2020 and other correctional bumps along the way without secondary emotional decisions, you’re fine on your own.

Finally, those with very simple situations, a 401(k) at work without any other options, wouldn’t gain much from paying for professional management for just a few extra gains that would occur otherwise with passive growth.

The complexity of one’s situation matters more than total cost because there are thresholds where even modest monetary holdings could benefit immensely from some professional help.

Finding A Middle Ground

What many fail to recognize is that there’s an option between complete DIY and comprehensive service investment management. Many advisors are happy to charge on an hourly basis for insight into one’s investment strategy before allowing the individual to execute what was discussed.

Similarly, robo-advisors allow automated solutions but human advisory input if needed along the way, this is helpful if you’re willing to go one step further but want someone else monitoring the situation without a premium charging performance.

The Bottom Line Around Greater Accessibility

Investment management has become democratized in ways that seemed unbelievable twenty years ago. Now it’s a question of whether it makes sense at all based on personal beliefs, less on net worth but more on opportunity cost, time, know-how, emotional maturity and complexity of financial situations.

And all those barriers that kept casual investors at bay have either diminished or no longer exist; now it’s about whether professional management makes sense based on parameters for whether a private individual can safely make smart decisions over multiple decades’ worth of time, because one great choice isn’t as valuable as thousands of good choices made over 30 or 40 years through bull markets and crashes alike.