What Is an Investment Manager?
Building an effective portfolio can be hard. An investment manager can help you identify smart investments and grow your wealth the right way.
Investing is a smart way to maintain and grow wealth. However, it’s important to build your portfolio the right way. Making shrewd decisions can make you money, but poor ones may cause you to lose out.
Hiring an investment manager is one way to ensure you’re building your portfolio smartly and correctly. They can assist you with identifying opportunities, avoiding mistakes, and, most importantly, reaching your financial goals. In this article, we’ll break down the role they play, whether one is right for you, and how to find one.
What They Do
An investment manager works with you to build and maintain your portfolio, as well as help you reach your financial objectives. This involves buying and selling assets, such as stocks, bonds, and real estate. The term can refer to a single person or a large organization.
When you hire someone to manage your investments, you can expect them to perform a wide variety of services for you. Of course, they’ll help you buy and sell assets, but they can do much more than that. Often, their value comes from providing guidance and identifying effective strategies, so that you can grow your wealth.
Below is a breakdown of each of the typical services investment managers provide:
Your financial goals are of utmost importance. Before someone helps you with your investments, they need to have a full understanding of who you are, including your risk tolerance and the investments you’re interested in. They’ll also need to know what your overarching goals are, as well as how soon you want to get there.
After you and your advisor are on the same page, they’ll help direct you toward achieving your financial goals by building a comprehensive investment plan.
A key aspect of managing investments is deciding how much, or what percentage, you want to allocate to certain assets. This may refer to traditional securities, such as stocks, bonds, or cash; however, alternative ones, like private equity, are also part of the conversation.
How you divide your assets is often decided by your risk tolerance and personal preference. An investment manager will discuss these factors with you and put a plan into action.
Once your advisor has both an asset allocation and overarching plan in place, they can begin to effectively manage your portfolio. This means conducting thorough research and analyses, so they can select ideal investments that match your goals. Often, they’ll review factors such as the following before making recommendations:
- Past performance. How a potential investment has performed in recent years is a critical factor in predicting what it will do later.
- Risk exposure. This refers to the amount of money you could potentially lose if you were to invest.
- Expense ratio. Investing in stocks and asset funds may come with operating expenses, which can cut into your returns. Some, such as index funds, may have fewer costs than others.
Portfolio management also necessitates constant monitoring and rebalancing. In basic terms, your investment manager will constantly review your assets and ensure you’re on track to hit your goals, as well as sticking to your asset allocation strategy.
No matter what, risk is a huge part of investing. A qualified manager will use several risk management techniques to protect your money as much as possible. However, there’s no way to completely eliminate risk. Common strategies to mitigate losses include:
- Standard deviation. With this, an expert will assess how likely an investment is to stray from its average returns. The lower the standard deviation it has, the more predictable it is.
- Position sizing. Putting more money into an investment can mean big returns, but it can also mean the same for losses. An expert can work with you to determine how much you should invest to lessen risk and optimize returns.
- Diversification. The quote, “don’t put all your eggs in one basket,” is something we’ve undoubtedly all heard. By diversifying your assets, you’ll ensure that you don’t lose everything off of one or two investments.
Ethics and Regulations
Investment managers are required to register as registered investment advisors (RIAs) with the Securities and Exchange Commission (SEC). This also means they must follow strict guidelines if they are to continue offering services. In many cases, an individual won’t be an RIA, but the company they work for will be.
One of the key guidelines RIAs must follow is that they must act as fiduciaries. This means that your best interest should always be their top priority. And if they don’t abide by this standard, they can be held legally and financially responsible. This also means that these professionals may not charge on a commission basis, where they earn money if you buy products they recommend.
You may also see professionals who are chartered financial analysts (CFAs). CFAs must go through rigorous training and exams to gain the credential. They must also follow a set of ethical standards, beyond just being a fiduciary:
- Uphold a standard of respect, integrity, and competency with clients.
- Only act in the interests of their clients, never themselves.
- Maintain thoughtful and pragmatic judgment at all times.
- Maintain the integrity of the global markets.
- Should be constantly learning and sharpening one’s skills to keep up with the ever-evolving financial world.
Should You Hire Someone to Manage Your Investments?
Whether you need an investment manager hinges on your financial situation. It’s always beneficial to have a pro on your side, but it may not be worth the cost for you right now. To decide whether you need an advisor, ask yourself these questions:
- How complex are my finances? If you have a complex situation, an investment manager could prove useful.
- Do I have a clear plan for the future? It takes time, effort, and expertise to plan out your financial goals. If you don’t have one, it may be time to hire an expert to leverage investments so that you can realize important milestones.
- How much do I know about investing? Knowledge is power. Without it, you may make avoidable mistakes or miss out on the right opportunities. Hiring a pro allows you to instantly have access to valuable expertise.
- How much can I commit toward investing? If you have a ton of money to invest, you may want to hire someone to help guide your decisions. However, if you’re just starting, it may not be necessary to pay someone a percentage of your assets just yet.
Making the right decisions is crucial to maximizing your returns in finance. If you have reservations about investing on your own, it may be time to find an advisor to jumpstart your portfolio.
How Much One Costs
Typically, investment managers charge clients assets under management (AUM) fees. The fee is made up of a percentage of your AUM. Most often, you’ll pay around 1%. However, if you have a large portfolio, the number will go down (or up if you have less).
Hiring a robo-advisor is a much cheaper alternative. It can provide you with similar portfolio management services using advanced data science and algorithms. However, keep in mind that you won’t have much human interaction, if at all.
You should also expect to pay additional fees for certain investments you make, besides the initial cost. For example, when you buy shares of an index fund, you’ll be on the hook for operating fees. Or, if you buy a REIT, you’ll need to pay federal income taxes on any dividends you receive (unless it’s in a Roth IRA).
How to Find an Investment Manager
There are tons of options to choose from if you want to hire an investment manager, whether it be large companies or individuals. Either way, you’ll want to make sure they have the proper credentials, such as being an investment advisor representative (IAR) or CFA. You can verify whether someone is an IAR using the SEC’s website. They’ll have completed Form ADV and have it on file.
Once you know who you’re considering hiring is qualified, the rest is up to you. Large companies typically have more resources at your fingertips but could be more expensive. An individual or smaller company can come with a cheaper price tag, and they may offer a more intimate experience.
If you need a head start in your research, consider using a free matching tool, such as this one. After filling out a form to narrow your search, you’ll be matched with up to three vetted financial advisors near you.
Frequently Asked Questions
Is an investment manager a fiduciary?
Yes, they are a fiduciary. This is because all investment managers must register with the SEC to become an RIA.
Is an investment manager the same as a financial advisor?
The term, “financial advisor” simply refers to anybody who offers financial advice, including people who manage investments. However, the former specializes in investing and portfolio management.
How much money do I need to get investment advice?
This depends on who you decide to hire. Some may not have a minimum investment requirement. However, others, such as private wealth managers, require anywhere from $2M to $5M to start working with them.
What is the average return from hiring a financial advisor?
According to Vanguard’s study, “Putting a value on your value: Quantifying Vanguard Advisor® Alpha,” an advisor can add an average value of 3% to your portfolio. However, this varies depending on your situation and who you work with. You can also expect a professional to offer value in non-monetary ways, such as providing useful advice, perspectives, and experience.
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