A recent news release from Johnson Associates indicates that financial professionals on Wall Street should expect to get a lot more than coal in their stockings this year. Bonuses for Wall Street pros are predicted to rise between 10% and 15% overall, with specialists in investment banking, brokerage, and equities seeing above-average increases in their bonuses. Johnson states that a typical managing director working at an investment bank could receive $1.5 million just in incentive payments, on top of regular salaries and other compensation. Great results from firms like Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), and Merrill Lynch (NYSE:MER) will trickle down among a host of workers.
Plenty of people are less than thrilled about the huge amounts of money some financial professionals receive, but a group of cleaning workers in London decided to do something about it. If you don't feel that picketing your local broker's business offices is likely to succeed, however, you should consider your alternatives. At the very least, you can do your part to keep more of your money in your pocket and give less for money managers to spend on expensive goodies for themselves. As the end of the year approaches, here are a few things for you to think about while evaluating your investment performance.
Did you get what you paid for?
If you have investments that are actively managed, you're almost certainly paying higher expenses than you would for a passive investment like an index fund. Some indexing proponents contend that there's never any reason to pay more than the bare minimum for an investment. Over time, they argue, the average actively managed investment will underperform a similar index fund because the index fund's expenses are lower. According to this argument, any money manager who outperforms the market consistently is simply the recipient of favorable random chance.
On the other hand, some experts believe that you can find good fund managers who can earn their fees by actively managing their investments. Although some of these experts, including the Fool's own Shannon Zimmerman of Motley Fool Champion Funds fame, still pay close attention to management fees and other fund expenses, they're not opposed to paying more than index-fund rates for the right mix of expertise and performance. And even though three years isn't a long enough time to let Shannon declare final victory, the outperformance of Champion Funds picks is one piece of data supporting the possibility that you can pick good managers.
Regardless of which viewpoint you happen to share, everyone can agree that active fund managers who consistently underperform their benchmarks without any corresponding reduction in risk aren't earning the money you're paying them. If some investments in your portfolio aren't meeting your expectations, don't wait -- find a better alternative and move on. Your investing life is too short to waste on bad fund managers.
Pay as you go
Increasingly, financial services companies are urging their clients toward accounts that charge fees based on a percentage of assets, rather than on a transactional basis. In part, this move responds to consumer claims that transaction-based compensation encourages financial professionals to "churn" their clients' accounts by artificially increasing the number of transactions in order to increase commissions. However, percentage-based compensation has its own benefits for financial services companies.
In some ways, the buy-and-hold investor is the bane of Wall Street. If all you do is buy a couple dozen stocks and watch them grow over the years, you'll only pay one set of commissions. Your brokerage firm, however, will keep incurring the expenses of producing account statements, mailing annual reports and other information to you, and complying with regulatory requirements associated with your account. It's a losing proposition for them.
However, with percentage-based compensation, Wall Street wins no matter what you do. Even if you make absolutely no transactions during a particular year, you'll pay a significant portion of your investment income and gains in the form of fees. Consider, for instance, that if you're paying a 2% flat rate on your account in fees and your portfolio earns a total of 10% during a year, you're giving up a fifth of your income for the year. Especially for retirees, who count on that income for their livelihood and can't replace it with earnings from employment, siphoning off that much money in fees can be devastating for their net worth over time.
Again, not all investors are harmed by these arrangements. If you perform a large number of transactions, then you may benefit from a percentage-based fee structure. However, it's worth taking a look at your own particular situation to determine whether or not you'd be better off paying as you go on a per-transaction basis. For many investors, making a switch could save them thousands of dollars every year.
Pay to learn
With many investment professionals, you pay to rely on their expertise. However, some financial planners offer you the chance to learn to handle your own investments. By paying a one-time fee, you can find a financial planner who is willing to plot out an appropriate course of action for you to follow and to explain what you need to do in order to follow it.
For some investors, such arrangements offer the best of both worlds. While the financial planner is always available to do updates or provide additional information as necessary, it's entirely up to you to determine whether or not you want to consult your planner on a particular issue. Furthermore, the lack of sales pressure can be a relief after dealing with professionals trained to increase sales activity for their financial firm.
The choices that you make about managing your financial affairs won't have a big enough impact to stop Wall Street professionals from taking home big bonuses every year. However, by making sure you don't freely volunteer a piece of your hard-earned money toward the Wall Street bonus pool, you can do what you can to maximize your own net worth. That's a bonus in itself.
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The biggest bonus Fool contributor Dan Caplinger ever got from his financial employment was four digits, not seven. Then again, he never claimed to be a good salesman. He doesn't own shares of any of the companies mentioned in this article. The Fool's disclosure policy never sells you a lemon.
