Your Investments: Using professional money managers

Investors need professional money managers to sort plethora of information and make decisions providing effective solutions to short and long-term goals

By AARON KATSMAN
January 12, 2011 22:42
3 minute read.
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Euro cents money coins 311 AP. (photo credit: AP)

With all the financial information that investors are bombarded with, it has become much harder for them to manage an investment portfolio that meets their needs. Many investors have thrown up their hands in despair and have started to look at using professional money managers. They want someone who has their finger on the pulse of the market, can wade through all the information and can make decisions as needed without having to contact the client.

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In the past, professionally managed investment accounts were only for the ultrarich investor.

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While tycoons such as Bill Gates or state pension funds had access to these money managers, they were generally off limits to the average investor. Back then, initial investments of $10 million to $20m. were the norm.

However, over the last five to 10 years, advances in technology that automate portfolio management have made managed accounts accessible and increasingly popular among investors who don’t necessarily have the millions that were originally required. Due to these advances in technology, minimum account sizes usually start with $50,000.

Discretion

One important advantage of having a managed account is that the portfolio manager has discretion over the account. This means he can make decisions without speaking to the client first, which can be an advantage when a decision needs to be made quickly.

In the more classic model of a broker and client relationship, the broker needs to get the client’s approval before initiating any transaction. The problem with this is that the time it takes to obtain the client’s okay can often be costly, especially if he is not easy to reach.

Choosing a money manager

There are two ways to choose a money manager. The first is to go directly to a firm that specializes in this field. While this is possible, it’s important to keep in mind that there are more than 20,000 professional money managers in the United States alone. Where would an individual even start his research?

The other option is by working with a licensed investment adviser via a brokerage firm. Many brokerage firms have research teams whose sole area of expertise is analyzing portfolio management firms, and they provide investment advisers with lists of the top-rated portfolio managers.

One advantage of using a brokerage firm is that they often have special agreements with the portfolio management firms, enabling clients to use the managers with relatively low minimum investments, often in the $50,000 to $200,000 range.

A third advantage of using money managers through a brokerage firm is that the adviser is able to oversee the manager the client is using. If the manager fails to perform as he should, or even if there has been a change of management at the firm, your adviser can relay that information to you, and you can switch managers at no cost.

All-inclusive wrap fee

Managed accounts usually charge an annual fee, called a “wrap fee,” which is based on the amount of money under management. Generally, all trading costs of the portfolio manager are included in this fee. This puts the client and the manager on the same side of the table and eliminates any conflicts of interest that a manager may have from selling products and receiving commissions for them. As the value of the account goes up, the manager makes more money; conversely, if the value drops, the manager makes less.

Speak with your adviser

To see if managed accounts are for you, it’s important to speak with your investment adviser. Your adviser needs to understand your short- and long-term financial goals and then see if managed accounts can provide you with an effective solution.

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Aaron Katsman, a licensed financial adviser in Israel and the United States, helps people with US investment accounts.


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