What You Get When You Pay For Investment Services

Investment services offered to individual investors come in a myriad of packaging and delivery options. Discount brokerage houses, full-service brokerage houses, load mutual fund firms, no-load mutual fund firms, banks, insurance companies, private money management firms and fee-based advisors all attempt to convince investors that they are the best available alternative. Yet, despite their different packaging they are each providing all or part of the same three primary value components - advice, portfolio management and administration.

Advice is the process of defining and implementing an appropriate investment strategy given an investor's objectives and particular constraints. Portfolio management is the process of building and maintaining an investment portfolio that properly addresses the strategy the advisory component has defined. Administration is all the trading, clearing and reporting functions required to effectively execute the portfolio management process.

This article will take a closer look at the subcomponents within each of the three broad value components and show you how to use them to analyze which parts of the financial management process are worth paying for, and which you may want to take on yourself.

Administration
Of the three components, administration is the one that you will be least able to do on your own. Any registered broker/dealer has access to many equity, fixed-income and commodities markets through which they can buy and sell. For a host of reasons, you are not able to go directly to these markets yourself. As such, this is a subcomponent that you will have to outsource and pay for in the form of some fee or commission. Fortunately, with online discount brokerages, the costs associated with trading are minimal. In addition, these costs cover trade settlement, confirmations, and other client statements, all of which are in compliance with mandated regulations. There are some other administrative services, however, that are not automatically supplied by your brokerage firm.

While year-end reporting for tax purposes is required, not all brokerage firms track cost basis for you. This is something you can do yourself with a spreadsheet or even a notepad, but depending on the number of holdings you have it can be a time-intensive. In choosing a brokerage firm, try to find one that keeps accurate track of your cost basis. It will save you time when you prepare your tax returns each year. (For more insight, read How do I figure out my cost basis on a stock investment?)

Another important administration function you can handle yourself is performance reporting. Truly accurate reporting, however, will be almost impossible without some fairly sophisticated software that keeps track of all cash flows and is able to calculate time-weighted total rate of return. If your brokerage firm can do this for you at no additional charge, you are receiving a material increase in value.

Portfolio Management
Most investors, and sadly most investment advisors, have little training or knowledge regarding security analysis and portfolio management. Typically, investor portfolios are built in a hodge-podge manner over time. Securities are chosen without benefit of in-depth analysis and without proper regard as to how they interrelate with one another. Holdings are often spread over numerous accounts held at various locations so there is little way to determine how the overall investment portfolio is performing.

http://www.investopedia.com/articles/basics/08/advice-portfolio

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What You Get When You Pay For Investment Services