AAR41 - Listener Q&A: DIY Investing vs. Wealth Managers?
Episode
46 min
Read time
2 min
Topics
Career Growth, Productivity, Personal Finance
AI-Generated Summary
Key Takeaways
- ✓Active Manager Underperformance: SPIVA research tracking active managers since 2002 found zero categories where the majority outperformed after 15 years. Across multiple independent studies, approximately 90% of active investors fail to beat the overall market, making the premise of a wealth manager consistently delivering 16% returns statistically improbable over a decade.
- ✓Fee Stacking Risk: Wealth managers who invest client funds into mutual funds create layered fee structures — clients pay the manager's 1% fee plus the underlying fund's expense ratio simultaneously. If a manager only marginally outperforms the market by 1-2%, those stacked fees can consume the entire excess return, leaving clients worse off than a simple index fund.
- ✓Tax Drag from Active Trading: Wealth managers who rebalance portfolios by selling positions trigger taxable events on realized gains throughout the year. DIY investors holding a single ETF like VOO pay capital gains taxes only upon withdrawal, keeping gains compounding untaxed as unrealized returns — a structural tax efficiency advantage passive investors hold over actively managed accounts.
- ✓ETF Entry Process: Opening a brokerage account at Fidelity, Schwab, or Plynk takes minutes. Depositing as little as $5 allows fractional share purchases of VOO, which tracks the S&P 500 at minimal expense ratios. Setting up automatic recurring weekly or monthly purchases removes behavioral decision-making and builds consistent investing habits without requiring ongoing attention or market timing.
- ✓Behavioral Fit Determines Strategy: Investors who panic during market downturns may benefit from a wealth manager's quarterly reassurance, even at the cost of lower returns. However, wealth managers are legally required to disclose underperformance, meaning clients still see the same red numbers. Self-aware investors who can hold through volatility statistically outperform by staying invested and avoiding unnecessary trading fees.
What It Covers
Hosts Evan Ray and Andrew Sather respond to listener Joey's question about whether hiring a wealth manager promising 16% returns justifies a 1% fee versus DIY index ETF investing, using SPIVA research data and personal experience to evaluate active versus passive investment strategies.
Key Questions Answered
- •Active Manager Underperformance: SPIVA research tracking active managers since 2002 found zero categories where the majority outperformed after 15 years. Across multiple independent studies, approximately 90% of active investors fail to beat the overall market, making the premise of a wealth manager consistently delivering 16% returns statistically improbable over a decade.
- •Fee Stacking Risk: Wealth managers who invest client funds into mutual funds create layered fee structures — clients pay the manager's 1% fee plus the underlying fund's expense ratio simultaneously. If a manager only marginally outperforms the market by 1-2%, those stacked fees can consume the entire excess return, leaving clients worse off than a simple index fund.
- •Tax Drag from Active Trading: Wealth managers who rebalance portfolios by selling positions trigger taxable events on realized gains throughout the year. DIY investors holding a single ETF like VOO pay capital gains taxes only upon withdrawal, keeping gains compounding untaxed as unrealized returns — a structural tax efficiency advantage passive investors hold over actively managed accounts.
- •ETF Entry Process: Opening a brokerage account at Fidelity, Schwab, or Plynk takes minutes. Depositing as little as $5 allows fractional share purchases of VOO, which tracks the S&P 500 at minimal expense ratios. Setting up automatic recurring weekly or monthly purchases removes behavioral decision-making and builds consistent investing habits without requiring ongoing attention or market timing.
- •Behavioral Fit Determines Strategy: Investors who panic during market downturns may benefit from a wealth manager's quarterly reassurance, even at the cost of lower returns. However, wealth managers are legally required to disclose underperformance, meaning clients still see the same red numbers. Self-aware investors who can hold through volatility statistically outperform by staying invested and avoiding unnecessary trading fees.
Notable Moment
Evan described his experience with an Edward Jones wealth manager who invested his funds into multiple mutual funds simultaneously — meaning he paid her advisory fee on top of each fund's own expense ratio, compounding costs he only recognized after researching how rarely active managers outperform passive index funds.
Episode Transcript
So this could be wealth managers like Govee is talking about. This could be fund managers, people that run some funds to try and outperform the market. And with their research, which they've been doing this since, I believe, it was 2002, but in their most recent publication last year, they said after fifteen years, there were, quote, unquote, no categories in which the majority of active managers outperformed. And that's added to many, many other studies from a lot of other outlets that show a ballpark figure of around 90% saying that 90% of active investors fail to outperform the overall market. When I first started my business, I remember how lonely and intimidating it was. You have to wear so many hats. You're having to figure everything out on your own, and you're basically learning everything from scratch. How I wish I had Shopify as my business partner when I first got started. Shopify is the ecommerce platform behind millions of businesses around the world, and 10% of all ecommerce in The US comes from Shopify. Household names like Alo Yoga, Gymshark, all the way the brands that are just getting started. You can get out the word like you have a marketing team behind you. Easily create email and social media campaigns wherever your customers are scrolling or strolling. Best yet, Shopify is your commerce expert with world class expertise in everything from managing inventory to international shipping to processing returns and beyond. And if you're stuck, Shopify is always around for award winning twenty four seven customer support. Start your business today with the industry's best business partner, Shopify, and start hearing. Sign up for your one day per month trial today at shopify.com/beginners. Go to shopify dot com slash beginners. That's shopify.com/beginners. This show is sponsored by Liquid I. V. As we finally transition out of the indoor hibernation and start spending more time outside, staying hydrated is huge. For me, spring means I finally get to get back out on the water and spend the long hours fishing. But those long sun drenched days require better hydration to actually enjoy them to their fullest. Liquid IV helps with that. Liquid IV helps keep you hydrated with a science backed formula designed with an optimized ratio of electrolytes, essential vitamins, and clinically tested nutrients. And right now, you can get 20% off your first order with code investing at checkout. Whether I'm traveling for work, spending all day casting a line, or just trying to recharge my social battery on the weekends, I know when I need hydration replenishment. And it feels great knowing Liquid IV can help boost hydration faster than water alone. It's incredibly convenient to use on the go, especially out on the boat. You literally just tear, pour, and enjoy. My go to flavor is lemon lime, but they also have great flavors like guava and golden cherry. Before I make any investment in the stock market, I'm always looking for …
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Books, tools, and gear mentioned in this episode
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Tools
- FidelityRecommended
“Opening a brokerage account at Fidelity, Schwab, or Plynk takes minutes.”
- PlynkRecommended
“Opening a brokerage account at Fidelity, Schwab, or Plynk takes minutes.”
- VOORecommended
by Vanguard
“Depositing as little as $5 allows fractional share purchases of VOO, which tracks the S&P 500 at minimal expense ratios.”
- SchwabRecommended
“Opening a brokerage account at Fidelity, Schwab, or Plynk takes minutes.”
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