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Why So Many Investors Think Investment Management Is a Commodity
I’m a bit worried this episode is going to annoy some people, but I feel strongly that investment management is not a commodity.
And I understand exactly why smart people think it is. When you look at the history of investment advice, it is easy to see how so many people — myself included — were trained to think that way.
Once upon a time, it used to be that people invested through stockbrokers who sold individual ideas. Then along came actively managed mutual funds, which not only provided investors with better diversification, but al felt more professional because you were not just buying one stock pitch anymore; you were hiring a manager. Then the conversation matured into asset allocation. Eventually, index funds began gaining traction as the evidence supporting an active approach to equity investing was pretty poor. Around the same time, you saw advisors outsourcing model portfolios. Then robo-advisors automated much of that same allocation work at an even lower cost. And eventually, for a lot of investors, the message became: just own a few low-cost ETFs and stop overthinking it.
And to be fair, a lot of that evolution really was better for investors: lower costs, broader diversification, and less dependence on expensive product sales.
So let me be clear: I am not here to defend the old pitch that you should pay a professional because they are going to outsmart the market by picking the right mutual funds. That argument deserved to lose.I’m here to say that basic market exposure has become cheap and standardized, but that does not mean investment management itself is a commodity.
That is the key distinction in this episode:
The commodity is the basic recipe. The value is in implementing a strategy that is customized and personalized to your specific needs.
If you are a DIY investor with real complexity in your financial life, there is a good chance you have underestimated what the job actually is.
And that raises the obvious question: when does complexity actually begin?
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When a Simple Portfolio Becomes a More Complex Problem
A lot of people think complexity starts at some very high asset level.
I don’t think that’s true.
I think complexity starts the moment you have more than one type of account.
A 401(k) and a taxable account? Now asset location matters.
An IRA, a Roth IRA, and a brokerage account? Now tax efficiency and future withdrawals matter too.
Company stock, RSUs, or stock options? Now portfolio construction has to account for the fact that your paycheck, future compensation, and investment exposure may all be tied to the same company.
Do you have a low-basis stock position or an old fund with large embedded gains that you no longer want to own? Now you have a transition problem, not just an allocation problem.
A future business sale? Now you have a pre-liquidity portfolio design question and a tax-planning opportunity, because how you position the rest of the balance sheet before the sale may matter as much as what you do after it.
So yes, complexity often starts with multiple account types. But over time it usually grows with success — more assets, more gains, more tax considerations, and more decisions that affect each other.
And one reason that complexity gets underestimated is that many investors do not have a clear way to measure whether the process is actually working.
Why Knowing Your Balance Is Not the Same as Knowing Your Performance
Here is the part I think gets overlooked even more.
In my experience, many DIY investors know their balance better than their performance.
They know whether the number went up, either in percentage terms or dollar terms.
But that is not the same thing as knowing performance.
And I want to be fair here, because many DIY investors are doing a lot of things right. They are saving consistently. They are keeping costs low. They are staying invested.
The problem is not that they are careless.
The problem is that most of the tools people use are built to make investing feel simple and reassuring, not to give them a rigorous household-level view of performance.
Your account balance tells you how much money you have. This is not the same as understanding your time weighted return. You are sometimes able to find your money weighted return, also known as internal rate of return, but the time weighted return is the number you need to calculate to better gauge whether your investment process is working.
We could probably do an entire episode on time weighted return, but it wouldn’t matter because calculating it in a spreadsheet on your own is not a realistic endeavor. So instead, I’ll just suggest that, at a minimum, a serious investment process should tell you five things: how the strategy performed, how your actual dollars performed, what benchmark matters, how the household is doing as a whole, and, for many investors, what the after-tax experience looks like.
Most of the DIY investors I talk to have built meaningful wealth, which is a real accomplishment, but they often do not have a clear sense for whether the portfolio is being managed as well as it could be.
And once performance is not being measured clearly, it becomes very easy to be overconfident about the quality of the process and believe in the idea that investment management is a commodity.
People say, “I think I’m doing pretty well.”
Okay. Based on what?
Compared to what?
Measured how?
At the account level or the household level?
Before tax or after tax?
This is one of those areas where confidence often starts to fade after a few follow-up questions.
What Real Investment Management Actually Includes
So what does non-commodity investment management actually include?
I think it comes in two layers: customization and personalization.
Customization is the foundation. It means making the portfolio fit the household you actually have, not the average investor in a model portfolio.
At a basic level, serious investment management customizes a portfolio in four ways.
First, it decides not just the asset allocation, but where assets belong. That is asset location — not just what you own, but where you own it.
Second, it manages the portfolio over time with a real process. That includes systematic rebalancing — not when you remember, not when you get nervous, and not when you happen to log in, but according to a disciplined approach. It also includes tax-loss harvesting done consistently, not just when it is convenient.
Third, it handles transitions well. That includes withdrawal sequencing, especially for retirees or near-retirees deciding which account should fund the next dollar of spending. It includes concentrated-position management. It includes a plan for legacy positions with large embedded gains.
And fourth, it measures results clearly. That includes performance reporting that lets you actually assess how your strategies and overall household is doing versus relevant benchmarks.
That is the baseline: where assets go, how the portfolio is managed over time, how transitions are handled, and how results are measured.
But these days, investment management can go a step further into personalization.
Personalization is deciding when a more tailored tool is actually worth using. That might include SMAs, direct indexing, specialized diversifying strategies, or options-based strategies. Unlike broad-market building blocks, these tools have more moving parts, more manager discretion, and more room for both value and mistakes.
A lot of investors still talk as if the only real decision is which index fund to buy. I understand why. Simplicity is often a virtue. But technology and lower costs have made more personalization available than many people realize, and for the right investor, it can matter.
But none of that works without due diligence.
Once you move beyond a commoditized portfolio, someone has to do the ongoing work: research managers and strategies, review fees, tax implications, and implementation, monitor personnel changes and style drift, and keep reassessing whether the solution still fits the client as markets change and as the investor’s life changes.
And when firms do not have the time, scale, or expertise to do that work themselves, they often outsource the judgment. When that ongoing work is missing, what gets called investment management is often just portfolio distribution.
Why Outsourced Models Deserve More Scrutiny
One of the biggest practical problems in investment management today is that many advisors do not actually have a real investment function.
What they have is an outsourced model.
Now, outsourcing is not automatically bad. A model portfolio can be a useful tool.
But a model is not the same thing as an investment process.
And outsourced models come with two risks that do not get talked about enough.
The first is conflict of interest.
If the model comes from an asset manager that also manufactures the underlying funds, there is an obvious incentive to use their own products. That does not automatically make the model bad, but it absolutely means the advisor and the client should ask harder questions.
The second risk is staleness.
Even if the model was reasonable when it was built, that does not mean it is being revisited with the rigor it deserves. Managers change. Strategies drift. Costs change. Tax realities change. Markets change.
And if nobody is regularly doing due diligence, reviewing assumptions, and asking whether the model still fits, then what looks like investment management may really just be a static allocation on autopilot.
In many cases, the client may be buying good planning with a lighter investment layer. That can still be a relevant service.
But it is not the same thing as full service investment management.
When Commoditized Investing is Fine–And When It Is Not
For investors early in their careers, or for people with very simple portfolios and very little tax complexity, a commoditized investing experience can be perfectly fine.
That might mean a robo-advisor, a basic model portfolio, a flat-fee planning relationship with a lighter investment layer, or a discount AUM arrangement.
The tradeoff is usually less customization, less tax management, less due diligence, and less accountability.
That tradeoff becomes much more important later in life, when the portfolio has to work across multiple accounts, tax constraints, embedded gains, business interests, or concentrated positions.
That is why I am skeptical of investments from a flat fee or discount AUM advisor. Not because lower fees are bad. But because lower fees often mean a thinner investment function. And that usually means a more commoditized investment offering.
How to Know Whether Your Investment Process is Really Good Enough
So let me close with this.
I am not saying every investor needs an advisor, and I am not saying a simple low-cost portfolio is bad.
I am saying something more specific.
Investment exposure may be a commodity.
Excellent investment management is not.
And if your financial life has grown beyond a couple of simple accounts — or if there is real tax complexity, concentrated risk, or a growing need for coordination — then it may be time to ask better questions.
Not just, what do I own?
Better questions are: who is making the decisions and what does that process look like, how are performance and taxes being measured, how is the portfolio managed over time, and who is accountable for all of it.
If this resonates, take those questions to your advisor.
And if you don’t have someone who can answer them clearly, it may be time to get a second opinion.
Because the biggest risk probably isn’t doing something obviously wrong.
It is doing something merely okay for so long that you never stop to ask whether okay is actually good enough.
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The Long Term Investor audio is edited by the team at The Podcast Consultant
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