Katherine Gustafson is an author and personal finance expert from Portland, Oregon. She writes about investing for Wealthsimple as well as having written for Forbes, Business Insider, TechCrunch, and LendingTree. Katherine is a past recipient of the Izzy Award for outstanding achievement in independent media. She has a BA from Amherst College and an MA from Boston University.
“Investment management” sounds like a self-explanatory term. But in a survey of 20,000 investors from 28 countries, each of whom had at least $12,000 invested, only 37% of respondents could identify what an investment manager actually does.
And what is that exactly? As the survey’s authors put it, an investment manager “manages money on behalf of clients, pooling their funds into various long-term investment strategies.”
This task is distinct from that of a financial planner, which is someone who provides investment advice and helps create financial plans that can help people meet their long-term goals.
So let's sort out what investment management is all about.
What is investment management?
A good definition of investment management is the business of managing clients’ investment portfolios or other assets in exchange for compensation. This can be done at any level, from a major financial firm investing the assets of other companies to individual managers investing the savings of individual clients.
Investment management is a fast-growing sector in—and a major money-maker for— the financial services industry. As assets under management (AUM) have increased in recent years as capital markets have globalized, investment alternatives have multiplied, and technology has enabled broader access to investment tools. Investment managers have proliferated.
Types of investment management
Investment management comes in two main forms: active and passive.
Active investment management involves making strategic decisions about investments in order to increase the return to the greatest degree possible. Active managers assert that they can “beat the market”—that is, provide more of a return than passive investments, such as index funds that generally track the performance of the market as a whole
Investment managers usually charge clients a percentage of the assets under management for this service, which can add up to a significant amount of money even at a rate of 1-2%. Some believe that active managers don't add much value after their fees and transaction costs are accounted for.
Just the same, many people decide to use active managers, as they perceive doing so will increase their chances of coming out ahead.
Passive investment management is designed to track the rise and fall of the market. Over a long period of time, the growth of the market generally matches or beats the returns brought in by active managers.
Passive management can be done by automated services such as robo-investors. The process involves investing your money in various funds, such as index mutual funds or exchange-traded funds, that will reflect the movement of the market. A good strategy can be working with a robo-investor that uses human advisors to help you through the process.
Do I need an investment manager?
When considering whether you want to hire an investment manager, remember that you can use an automated service to passively invest and likely come out with a portfolio worth just as much as if you had used a traditional investment manager.
However, there are certainly valid reasons for hiring an active manager. These include helping you stick to an investment plan, guiding you in the creation of a robust portfolio, rebalancing your investments using logic and not emotion, and adjusting your investment balance as your life evolves.
If you do decide to pay for these services, make sure you know exactly what you’re paying for. Be confident the investment will be worthwhile to you, even if the return is more in peace of mind than in dollars.
Choosing the right investment management
A high level of trust is necessary to work well with an investment manager. One way to encourage that is to vet your prospects’ credentials.
The Securities and Exchange Commission (SEC) regulates investment managers who have control of $110 million+ in client assets. State securities regulators oversee those who manage less than that—individuals, mostly. Look up your prospective manager on the BrokerCheck website run by the Financial Industry Regulatory Authority (FINRA).
Ask your prospective investment manager whether they act as a fiduciary, which means they have an obligation to act in their clients’ best interests. Those who are not fiduciaries may prioritize commissions or other forms of personal gain above their clients’ needs.
It’s much more important to look for a manager who provides the kind of service you want, is a good fit for your style and needs, and whose fees are reasonable. Here are some things to look at:
Fees: Too many high fees will cancel out any benefit a manager will bring you; inquire about the cost of commissions, trade fees, and AUM fees.
Hassle: Does it seem that working with this person or service will take a lot of time and energy? If a major point of hiring someone is to simplify your life while taking care of your money, make sure the person you hire does so.
Services: Does the manager offer all the services you’re looking for? Does he or she promise to help you in the ways that you need?
Experience: Does the manager have experience helping people like you reach the kinds of goals you're hoping to achieve?
Certifications: What industry certifications has the person received (e.g., CFA, CFP)? Is the person registered with the state? Is he or she a fiduciary?
Approach: What is the manager’s approach to investment? Why does he or she think that approach will produce better results than the market as a whole?
The final bullet point on this list is essential; if the point of hiring an investment manager is to beat the market, then it’s important to be very clear on why you believe they will be able to do so.
“Here is the thing: if you cannot assess an investment manager’s process and ascertain that you think it is likely to produce superior results and then monitor that the manager is sticking to it, chances are you are better off with a low-cost, passive investment,” writes Gary Mishuris, managing partner and chief investment officer of Silver Ring Value Partners, in Forbes.
How to assess a manager’s track record
One pitfall when choosing an investment manager is to base your decision too heavily on recent investment returns. Considering that recent returns tell you almost nothing about how the investments will perform over the long-term, prioritizing them is a mistake.
Instead, look for a manager who can offer a record that can be audited by the Global Investment Performance Standards (GIPS). These are global standards for investment performance that allow consumers to compare the performance of different firms in order to make judgements about their investment track records. Any investment manager you hire should be able to provide you with a GIPS-compliant audit of their returns. The inability or unwillingness to do so is a red flag.
Choosing an investment manager is difficult. It can be tricky to judge the ROI of the amount one must invest in fees to retain the manager’s services. That’s why it's worth looking at both active and passive investment managers and services, and in thinking carefully about what is valuable to you. An investment manager helping you in intangible ways, such as peace of mind or the availability of long-term, ongoing consultation, can be just as valuable as the financial returns they might offer.
Just be clear on what you’re looking for in your investment management, and let that perspective guide you in finding the professional or service that’s right for you.
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