What is Subscription Investment Management?
Subscription investment management options are now becoming available and are useful for some who desire professional help in managing their investment savings. Under this approach, an investment advisor will manage the clients’ investment portfolio(s) for a flat monthly fee that remains the same, since it is not determined by the total value of the funds being managed.
In addition, an initial one-time fee will be charged for consultation services to determine the client’s appropriate and desired risk characteristics for investment assets that are selected for the portfolio. The advisor will then position investments in “index” funds and/or “exchange-traded funds” (ETFs) with annual expenses typically averaging between 0.08% and 0.19%. Usually, the advisor will require a set amount of the investment total (such as 60%) always be invested in the advisor’s proprietary funds.
Under this advisory arrangement, the advisor’s compensation will be more than what it first seems. Whenever an advisor’s own funds are used, it is often overlooked that the fund’s expense fees will provide additional compensation for the advisor. Additionally, some advisors will require that a minimum portion of the investment portfolio be maintained in “cash” money-market funds that only pass through a very low rate of interest. In these instances, most of the interest (up to 70% of it!) is also retained by the advisor to provide another additional source of compensation.
This type of advisory service may be called a “premium” service whenever related financial planning advice is also provided without any additional cost to help clients with objectives, such as: defining one’s risk tolerance, minimizing taxes, saving for college, financing a home, managing debt, and other client specific issues. Most often, this advice comes from a representative of the advisor, who is available by phone call to a location that is not local to the client.
It is often overlooked that subscription investment portfolios are usually “fixed” with set investments that do not change in response to any changing external market conditions. There may be periodic portfolio “rebalancing” to retain the preset percentage that is allocated to the various investments, but present market conditions related factors such as earnings, PE ratios, interest rates, expansion or recession cycles, and other relevant measures are ignored.
Other Competitive Factors to Consider
Returns Net of Fees will be Lower
Subscription portfolios use only “passively” managed index and exchange-traded funds (ETFs) that have had a history of below-average investment returns when compared to “actively” managed investment funds over the same period.
Recently (2019), Fidelity (a top-quartile fund company) published a study that shows “active” investment management beat “passive” in 12 of 18 investment categories (there was one tie). The study also displays excess returns. There was only one investment category with significant passive outperformance: “large-cap” growth. In the five categories where passive outperformed active, the excess returns are minimal. (less than 1%).
However, in those categories where active beat passive (67%, or two-thirds of all categories), the excess performance was almost always at least 1% net of fees. This result shows that for most asset classes (other than “large-cap” where the companies are well known and broadly researched) investment funds provided by firms that have research expertise and managerial talent do significantly outperform their indexes over a full market cycle, which includes periods of rising as well as falling prices during cyclical expansion and recession periods for the world’s economies.
Investment Liquidity
Previous serious market downturns have shown that there are liquidity concerns for many ETFs during periods of significant market volatility, especially for those that are thinly traded. Many exchange-traded funds also have investment holdings that are subject to mispricing during volatile periods.
By Default, “Passive” Strategies Provide “Average” Returns
“Passive” investment strategies will provide only an “average” return, since the return will necessarily come from an equal exposure to the investments that comprise the index that being followed. Also, there will be no opportunity to outperform the market index over time periods that comprise full positive and negative market cycles.
Concluding Thoughts
Subscription investment management options are now becoming available from some advisory firms that wish to have an affordable offering to attract younger clients who are beginning to save and plan for their future needs. Also older clients, who simply want to pay the lowest investment advisory fees, may feel they will be satisfied having periodic phone contacts with an advisor representative, who generally will have less planning experience, accepting the fact there is high turnover in these entry-level representative positions.
In evaluating whether subscription investment management may be right for your needs, make sure to compare costs for all advisory firms under consideration by asking for “net returns” after subtracting any advisory fee and investment costs. Many advisory firms will be able to demonstrate that higher returns and lower risk exposures have been generated for their clients than would have been realized by the subscription service under consideration, while having the advantages of a local presence and face-to-face relationship that enhances communication, convenience, and likely better financial satisfaction.
Greg Tinaglia
Last Updated: 04/06/2019