If you’re an investor, you probably work through a financial consultant, someone licensed to recommend specific investments. Many times, a consultant recommends placing funds with a professional money management organization, which will invest the assets for you based on your objectives and tolerance for risk. In these cases, the consultant’s role is to find the money manager best suited to helping you achieve your goals.
Because there are thousands of professional money managers today, finding the one best suited to manage your assets is an enormous challenge. Here are four critical questions to raise when your financial consultant recommends a specific money manager.
What is the money manager’s investment philosophy?
There is a lot to know beyond simply asking whether a money manager buys stocks, bonds, or a combination of both. A good money management firm should be able to articulate its investment style clearly. Ask questions about how they judge whether an investment is suitable for you, how they decide to buy and sell securities, how the firm allocates assets over many types of securities, the source of research data and the risk management procedures.
What do you know about the personnel of this money management organization?
A key role of a consulting firm is to screen the credentials of money managers and other professionals regarding their education, business experience, tenure with the company and other factors. As a whole, the professionals in a money management organization should represent a variety of expertise and depth of experience so the organization’s management style will be consistent over the long term.
How do you verify the long- and short-term performance record of this manager?
Performance measurement is, of course, very important in evaluating a money manager. While short-term performance can be an indicator of developing strengths or weaknesses in a money manager, the better indicator of a manager’s effectiveness is the long-term track record. Ask about yearly and cumulative total returns (yield plus capital gains) for five, seven and 10 years. Ask how the performance compares to an appropriate index of similar investments. And, most of all, ask if the consulting firm conducts an independent verification of the performance reported by the money manager. As you know, past performance is no guarantee of future results.
How well does this money manager communicate with clients?
Clients with managed accounts generally receive regular reports of account activity from their money managers. These statements should be an understandable summary of all investments, listed by asset category, with reports of gains, losses and current market values. The same information should be reported for the entire portfolio. Ask to see a sample report. Good managers also communicate with clients through their financial consultants and sometimes through client newsletters. Ask about a manager’s client communication policy before opening an account.
Robert Cargin is a financial consultant with Smith Barney’s Dublin office. He can be reached at (614) 798-3249.