Unlike other investment firms (fee-only investment advisors and retail advisors), Linden Thomas & Company directly manages money for their private client (Institutional Direct). We also have a team of CFP®s, CFAs, FPs, FAs, and other industry experts that work together to help each client. This enables each client to plan, manage, and navigate before and during retirement. The main benefit is that our structure removes unnecessary layers of fees.
There are four main disadvantages when investments are placed in third-party mutual funds:
Seldom do retail advisors tell investors the real cost of investment products like Exchange Traded Funds (ETFs), mutual funds, and annuities. In addition, pooled funds often carry hidden expenses that can be challenging for the less experienced investor to discern. These fees include expense ratios, trading costs, spreads on trades, and high advisor fees.
ETFs and pooled mutual funds can present investors with pricing disadvantages that have a significant negative impact on yield and growth. This is often the case when monies are invested in pre-existing portfolios where bonds or stocks are priced above their fair market value.
Unfortunately, when investing in pooled products, the behavior of other investors will impact individual results. When markets fall, for instance, emotional investors pull out, forcing fund managers to sell when they should be buying. This not only impacts down-market results but increases fund trading costs.
When investing in pooled investment products, the investor and portfolio manager have no relationship. Without a relationship, the portfolio cannot be tailored to the investor’s needs and timeline.
Old School Versus New School
Historically, investors could hire a financial planner or financial advisor for a fee to invest in products like mutual funds, annuities, and ETFs. The downside is the investor is charged a fee for advising while incurring additional fees to be placed in pooled investment products like mutual funds or ETFs (which carry hidden trading costs and pricing disadvantages which impact investment results).
This means that investors have high costs from the advisor but if you peel back the onion you find other hidden fees of products that can be very expensive.
Disadvantages of Investment Advisors
Advisor fees typically range from 0.50% to 1.50%. Keep in mind, however, that this is often just a fraction of the cost. The advisor’s fee is only for advice, not portfolio management.
Most industry advisors choose to put their client’s monies in products that are pooled with other investors. These products are associated with multiple disadvantages, such as cost and small investor herding impact.
When investing in pooled funds or ETFs often these investment funds have thousands and sometimes millions of other investors with other needs and behavior. The behavior of pulling money out and putting money in impacts costs, taxes, and most importantly, results.
Many investments carry with them layers of fees and pricing disadvantages. Trading costs, expense ratios, spreads, pricing disadvantages, and herding impact must all be factored in when considering an investment in pooled products.
Advisor fees average 1.00%, expense ratios average 0.80% to 1.20%, and trading costs average 0.05% to 3.00%. Potential pricing disadvantages can present significant hurdles, and can also create additional hidden expenses.
Advisor fees are seldom used to help build and support the investment discipline, practices, and technology that an investment team needs to succeed. This is often the reason why investors fail to achieve superior results.
Transparency of holdings, turnover, and the real cost of investment products are often challenging to uncover without significant research.
This is often seen in mutual funds and ETFs where bonds and stocks have been purchased within the fund and have gone up in value prior to your investing. Then the security is at a premium with no benefit to new investors. This, along with fees, can greatly reduce results and net yield to investors.
When investors tire of paying fees to an advisor for reasons such as poor advice, high cost, or adverse results, they’ll often attempt to manage their investment themselves. While this does save some advisor cost, the investor no longer has access to a team that can one, help them manage their investments as their needs adjust with age and two, navigate ever-changing markets.
Investors placing money in pooled mutual funds are subject to pass-through taxes. Even when investors are down, selling of internal fund holdings can create capital gains.
Often when investors get tired of paying fees to an advisor who invests in products, (potentially because of poor advice, high cost, or adverse results) they will take it upon themselves to invest in no-load mutual funds like index funds.
While this does save some advisor cost, this now limits investors when it comes to research and having a team that helps navigate making decisions as they get old and needs and markets change.
Disadvantages Of Do-It-Yourself Investing
Investing for positive outcomes requires a team of professionals with access to the technology needed to maximize investment results. Those results require a team with a singular purpose; to build, manage, and service the client’s portfolio with honest, reliable service.
Often, the cost of a mutual fund – with its expenses and trading costs – are greater than the cost associated with engaging an institutional private wealth manager such as Linden Thomas & Company.
Pricing disadvantages in pooled mutual funds often have a negative impact on investment results. This is often the case with funds built with overpriced bonds and stocks, which contributes to low yields and low yield to maturities.
Technology and earnings quality disciplines, such as those offered by Linden Thomas & Company, have given affluent investors access to the world-class portfolio management and the portfolio efficiency technology that contribute to enhanced results.
A team of investment professionals, like the team at Linden Thomas & Company, can help each client navigate the complex challenges associated with strategies around income needs, tax efficiency, risk, and down-market recovery.
Even with a high advisor cost gone, the cost of retail mutual funds is often more than Linden Thomas & Company Institutional Direct.
New School - Linden Thomas & Company Institutional Direct
Institutional Direct is a discipline where we manage our clients directly through individual securities (individual stock and bond purchases). Because Linden Thomas & Company is the asset manager, it employs a team of expert CFPs, CFAs, advisors, and other industry experts. This gives each of our clients the benefits of having their assets managed directly and not through a third party. As a result of hiring us directly, clients avoid the high cost of investment advisors and the hidden cost of third-party mutual funds. Our client's portfolios are tailored and managed directly for each investor, giving each of our clients total control and transparency while minimizing cost and portfolio inefficiencies of pooled investing.
Through Linden Thomas & Company's tailored portfolio management, each investor gains the ability to have their assets managed through equity and fixed income portfolios with proved time-tested results.
The Benefits of Institutional Direct include:
Because Linden Thomas & Company manages assets directly for our clients, there is no need for our investors to hire an advisor that will put them in a third-party mutual fund.
Expense ratios, trading costs, spreads on trades, and pricing disadvantages are all reasons why investing in mutual funds can be painful. Because Linden Thomas & Company manages portfolios directly through individual securities, investors no longer fear hidden fees.
Pooling your money with other investors means you pay for their inexperience and, often, bad behavior. Through institutional Direct, you own the securities directly and control your own investment destiny.
Reducing portfolio inefficiencies, like down-market risk and recovery, help enhance investor results.
Because each of the Linden Thomas & Company institutional portfolios is tailored specifically to our clients' needs it allows us to build each portfolio with a focus on results and reducing costs.
"Most advisors know what is right for their clients, but what is right is not easy, so they choose easy." ~ Stephen L. Thomas
Why doesn't every investment advisor do what Linden Thomas & Company Does?
Simply, it comes down to background, desire, team, and costs. When Linden Thomas & Company founder Stephen Thomas began his career 30-plus years ago in Washington, DC, his goal was to build a private wealth asset management firm committed to offering the best advice and delivering the best results. While many of his peers were satisfied in selling mutual funds for a fee, Thomas was busy developing a team that could build proven and consistent results
Over the years, Thomas and his team have been recognized 32 times as one of the top advisors and wealth management firms.
What most investors don't know about pooled investment products like mutual funds, ETFs, and annuities are they carry significant disadvantages that are often hidden to the naked eye. While inefficiencies are not visible, they do impact investor results.
Items that impact investment results in pooled products
Small investor herding happens when poor behavior and uncertain markets collide. When markets fall, investors tend to panic and sell when they should instead, be buying. As a fund owner, you are forced to participate in bad behavior even if you don’t want to; which, of course, impacts your results.
Mutual funds incur trading fees which are seldom discussed. The flow of money, small investor behavior, and manager trading all contribute to trading costs.
Expense ratios are often the only cost that investors consider when fund investing. Expense ratios are often the least expensive line item in an assortment of costs.
Spreads on trades are what traders collect to buy and sell securities.
While it is not an actual expense item, pricing disadvantage is one of the most significant contributors to poor results. These costs are often found in bond ETFs or mutual funds, and when bond prices are at premium with low yield to maturities.
Often seen in market cap index funds, where earnings quality is not a consideration, but the market cap is (size).
When trying to earn income, internal bonds with low yield to maturities can often force investors to live on less or sell bonds to pay for living expenses.
Phantom taxes come into play when funds sell positions due to investors pulling out. In some cases, taxes are then passed on to fund shareholders, even though they lost money in the fund.
Real holdings, unrealized gains, true costs, number of investors… all are factors to be considered, but hard to identify, when owning a fund.
All of these items are seldom discussed by advisors and fund companies and they all can impact results. This is why Linden Thomas & Company built a private investment firm with a focus on tailoring and building private portfolios through individual securities.
"It's not what you say that's important, it's what you do." ~ Stephen L. Thomas
How to Compare Linden Thomas & Company versus your investment advisor
