Because portfolio managers are fiduciaries, there are often no commissioned salespeople. Typically when working with a firm that manages individual portfolios, investors are only charged an annual management fee without commissions. Simply put, portfolio managers provide a craftsman service; they don’t sella product.
This difference is apparent in the tax treatment of mutual fund fees and portfolio manager fees; the latter’s fees are tax deductible because they were paid in exchange for fiduciary advisem*nt, similar to accountant or lawyer fees.
Employees are paid on salary and advisory services are targeted for wealth maximization, not to make commission. These portfolio managers are bound by a fiduciary duty wherein they are entrusted with the assets of an individual and are legally required to act in the best interest of their client at all times. As a result, fiduciaries must justify each move they make on their client’s behalf. Any investments made must be in line with their agreed upon investment policy statement.
Different Benefits of Funds and Portfolios
Although funds are typically associated with higher fees, tax inefficiencies, and random diversification (as opposed to strategic diversification in portfolio management), they can offer two main benefits: lower minimums and convenience.
Funds often have lower capital requirements when compared to their portfolio management counterparts. This is because risk diversification is easier to achieve when you are purchasing units of a pooled investment, instead of building your own portfolio independently and acquiring enough funds to both diversify and justify trading costs.
This could be compared to the trade-off between pitching in and sharing a pizza with your friends or buying all the ingredients to make one yourself. If you only have $5, you will be unable to build your own pizza. (You could try, but you will barely be able to buy the dough, and that does not sound very tasty.)
But if you and your friends pooled your money, you would be able to order a pizza together. The caveats are that you would have less control over what goes on top of the pizza, you would need to compromise on where to order from, and you can forget about any special requests like gluten-free crust.
