One Good Call?

We recently had another meeting with my wife’s financial advisor. At our previous meeting I’d been fairly open about my opinion that he hadn’t delivered meaningful investment gains compared to my own self-managed Vanguard portfolio, and at considerably higher fees. I suspect he wasn’t thrilled about that.

He came prepared. He presented a multi-sheet analysis of how his firm had managed my wife’s investments in the lead-up to the 2022 bond crash: aggressively de-risking into ultra-short duration bonds and cash-like instruments, alongside a pivot into commodities. It was clearly designed to make a point.

And to give credit where it’s due, the preemptive bond pivot worked a treat.

What I hadn’t fully appreciated was that this wasn’t a one-shot defensive call. The firm subsequently rotated back into short and medium duration bonds at an opportune moment, catching most of the subsequent rally from an already positive position — a position only achievable because they’d avoided the crash in the first place. A passive 60/40 investor meanwhile took the full 13% drawdown on their bond sleeve and has only nominally recovered that ground three years later.

When I pushed back on fees, his response was disarmingly straightforward: they only need to make that level of macro call once a decade to justify a significant portion of the cost. When I worked through the arithmetic on a portfolio of meaningful size, it’s hard to entirely disagree. Protecting and then capitalising on a dislocation of that magnitude can represent many years of fee differential in a single cycle.

Worth noting: the ground had already shifted before he opened his laptop. At our previous meeting I’d secured a meaningful fee reduction and a more joined-up view of our combined accounts, he now has to advise with my Vanguard holdings firmly in the frame. His 2022 performance is history. He’s essentially restarting from a lower cost basis, tasked with proving that even at a discount, his macro calls can add value alongside my set-and-forget indexing.

His broader point — one I’ll concede deserves more credit than I’d previously given it — is that investment management is only part of what my wife is paying for. Bespoke tax planning, account optimisation, and estate planning can add real and recurring value year on year, not just in a crisis.

I’m far from ready to declare the debate settled. I’d want a multi-year picture across the whole portfolio, and I’d like the tax planning value quantified rather than assumed. But the arithmetic on the bond crisis alone suggests the outperformance likely covers a decade’s worth of fees, a harder number to argue with than I’d like.

What started as a fairly straightforward challenge to active management fees has become a more genuinely interesting question about where active management actually earns its keep. On this singular case, I’m rather annoyed I don’t have a clear answer…at the moment.