Selecting An Investment Manager: Key Considerations

Choosing an investment manager is a complex process that requires careful consideration of both quantitative and qualitative factors. It involves evaluating the manager's investment process, personnel, and portfolio construction, as well as conducting operational due diligence. When selecting an investment manager, it is essential to consider your financial planning needs, investment goals, and risk tolerance. Here are some key factors to keep in mind when making your decision:

- Investment Philosophy and Process: A clear understanding of the investment philosophy and process is crucial. Evaluate the assumptions made by the investment manager, their ability to exploit market inefficiencies, and the consistency of their investment strategy with their philosophy.

- Performance and Track Record: Analyse the investment manager's track record and performance, but avoid solely relying on recent returns as a deciding factor. Look for consistent, long-term performance and be wary of chasing short-term gains.

- Fees and Expenses: Investment managers charge various fees, including management fees, performance fees, custody fees, and commissions. Consider the fee structure and ensure it aligns with the services provided and your financial goals.

- Qualifications and Experience: Assess the investment manager's qualifications, industry experience, and track record. Look for relevant degrees, certifications, and a strong understanding of financial data and market trends.

- Client Service and Communication: Choose an investment manager who prioritises client service and effective communication. Ensure they have the ability to explain complex financial concepts and provide personalised advice tailored to your needs.

- Regulatory Compliance: Ensure the investment manager is registered and compliant with regulatory bodies such as the Securities and Exchange Commission (SEC) or relevant state securities regulators.

- Specialisation and Expertise: Consider the investment manager's specialisation and expertise in specific sectors or investment types. Align their expertise with your investment goals, whether it be in technology, healthcare, energy, or other sectors.

Investment manager qualifications

Investment managers are individuals or organisations that advise clients through financial planning, investing, and portfolio management. They are responsible for handling their clients' financial planning, investing, and portfolio management activities. They devise strategies and execute trades within a financial portfolio.

Investment managers commonly hold undergraduate degrees in business, statistics, finance, mathematics, or accounting. A master's degree in business management or administration is also beneficial. Additionally, professional certifications such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) can enhance an investment manager's credentials.

Graduates can enter the industry as investment analysts and progress to manager roles with experience. Investment managers typically share certain skills, including excellent communication skills, the ability to gain and maintain client trust, analytical skills for interpreting market information, a solid understanding of financial data, and the ability to work effectively under pressure.

Regulatory Requirements

In terms of regulatory requirements, individuals interested in becoming investment managers should follow the standard path for all regulated financial advisors. This includes completing a bachelor's degree in a relevant field, such as finance, accounting, or economics, and considering an advanced degree like an MBA for future career advancement.

The next step is to take the Series 65 exam through the Financial Industry Regulatory Authority (FINRA) and gain additional certifications, such as the Certified Financial Planner (CFP) or Personal Financial Specialist (PFS) qualifications.

Finally, registration with the Securities and Exchange Commission (SEC) is essential, and the specifics will depend on factors such as the location, the size of the portfolios managed, and the level of certification attained.

Investment manager skills

Investment managers require a broad set of skills and qualifications to carry out their roles and responsibilities effectively. Here are some of the essential skills an investment manager should possess:

Education and Expertise:

• Investment managers typically hold undergraduate degrees in fields such as business, statistics, finance, mathematics, or accounting.
• Advanced degrees, such as an MBA or professional certifications like Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), or Chartered Investment Counselor (CIC), can enhance their credentials and expertise.
• A strong educational background provides a solid foundation for understanding financial data, interpreting market information, and making informed investment decisions.

Analytical and Problem-Solving Skills:

Proficiency in data analysis and a knack for solving complex problems are crucial. Investment managers need to interpret market trends, assess investment opportunities, and make strategic decisions based on analytical insights.

Communication and Interpersonal Skills:

• Excellent communication skills are vital for building trust with clients, explaining investment strategies, and providing clear and concise advice.
• Effective communication also extends to collaborating with colleagues and other professionals, such as lawyers and accountants, to ensure a holistic approach to wealth management.

Stress Management and Adaptability:

The ability to work effectively under pressure and thrive in a competitive, dynamic work environment is essential. Investment managers need to make timely decisions, adapt to market changes, and manage client expectations during volatile market conditions.

Passion and Client Focus:

A genuine passion for the field and a deep understanding of client needs are key attributes. Investment managers should be dedicated to helping clients achieve their financial goals and be willing to go the extra mile to ensure client satisfaction.

Creativity and Innovation:

While numbers and data are crucial, investment managers also need creativity to develop diverse investment portfolios tailored to individual client needs, passions, and beliefs. This involves a certain level of innovation and a forward-thinking approach to investment strategies.

In summary, investment managers require a unique blend of technical expertise, analytical prowess, strong interpersonal skills, and a passion for helping clients. This diverse skill set enables them to navigate the complex world of investments and provide valuable advice and direction to their clients.

Investment manager fees

Investment management fees can be a complex and detailed process. Fees and expenses typically include management fees, performance fees, custody fees, and commissions. The fee structure is often based on a percentage of the client's assets under management (AUM). For example, an individual with a $5 million portfolio handled by an investment manager who charges 1.5% annually would pay $75,000 in fees.

It's important to note that investment management fees can take one of two forms: a fixed percentage fee based on AUM or a performance-based fee. The latter charges a percentage of the portfolio's total return or excess return over a benchmark or hurdle rate. Most managers that charge a performance fee also charge some level of fixed percentage fee to aid business continuity efforts.

When choosing an investment manager, it is crucial to consider the fee structure and potential hidden costs. Some investment managers may charge additional fees for services such as financial planning, tax advice, or estate planning. It is also important to evaluate whether the fees are worth the value and service provided.

Additionally, it is essential to understand the difference between investment managers and investment advisors. An investment manager is a type of investment advisor, and they are regulated by the Securities and Exchange Commission. Investment advisors provide advice about securities to their clients and can include asset managers, investment counselors, portfolio managers, and wealth managers. They may offer a combination of services, such as investment portfolio management, financial planning, and licensed brokerage services.

In summary, investment manager fees can vary and are an important consideration when choosing an investment manager. It is crucial to understand the fee structure, potential hidden costs, and the value provided by the investment manager to make an informed decision.

Investment manager performance

Quantitative Analysis

The quantitative analysis focuses on the investment manager's track record and performance. This includes examining the investment returns and understanding how these results were achieved. It is important to assess the likelihood that the investment manager will continue to generate superior or satisfactory returns. Quantitative analysis also involves evaluating the upside capture ratio, downside capture ratio, maximum drawdown, drawdown duration, and up/down capture.

Qualitative Analysis

The qualitative analysis consists of two main components: investment due diligence and operational due diligence. Investment due diligence evaluates the investment process, investment personnel, and portfolio construction. It is crucial to assess the investment philosophy, investment strategy, and the expertise and experience of the investment personnel. Operational due diligence, on the other hand, evaluates the integrity of the firm, its operations, and personnel. This includes assessing the firm's infrastructure, integrity, and personnel to ensure they meet the required standards.

Due Diligence

Due diligence is a crucial aspect of investment manager selection. It involves a detailed investigation and analysis to understand how the investment results were achieved. Due diligence focuses on assessing the likelihood that the investment process that generated the returns will continue to produce superior or satisfactory results in the future. It also entails evaluating the firm's integrity, operations, and personnel to ensure they meet the required standards.

Fee Structures

When choosing an investment manager, it is essential to consider the fee structures. Investment managers typically charge a percentage of the client's assets under management (AUM). However, there can also be additional fees such as management fees, performance fees, custody fees, and commissions. It is important to understand the fee structure to ensure it aligns with the client's expectations and budget.

Investment Philosophy and Process

It is crucial to evaluate the investment manager's philosophy and process. The investment philosophy outlines the assumptions about the factors that drive performance and the manager's beliefs about exploiting these sources of return. The investment process should be consistent and appropriate for the philosophy. It is also important to assess the expertise and experience of the investment personnel to ensure effective execution of the investment process.

Style Analysis

Style analysis is an important component of performance appraisal and manager selection. It helps to understand the manager's risk exposures relative to a benchmark. Returns-based style analysis (RBSA) and holdings-based style analysis (HBSA) are two approaches used to evaluate risk exposures. RBSA involves estimating risk exposures from actual return series, while HBSA estimates risk exposures from the actual securities held in the portfolio.

Pooled Investment Vehicles and Separate Accounts

The choice between pooled investment vehicles and separate accounts depends on the consistency with the investment process, suitability for the investor, and the benefits outweighing the additional costs. Pooled investment vehicles, such as mutual funds or exchange-traded funds (ETFs), offer diversification and professional management but may have limited liquidity. Separate accounts provide more customised investment strategies but may have higher fees.

Performance-based Fees

Investment managers may charge a fixed percentage fee based on assets under management or a performance-based fee, which is a percentage of the portfolio's total return or excess return over a benchmark. Performance-based fees align the interests of managers and investors by sharing investment results. However, most managers also charge a fixed percentage fee to ensure business continuity. It is important to carefully design fee structures to avoid favouring one party over the other.

Investment manager due diligence

The qualitative analysis has two components: investment due diligence and operational due diligence. Investment due diligence evaluates the manager's investment process, investment personnel and portfolio construction. Operational due diligence evaluates the manager's infrastructure, including the integrity of the firm, its operations and personnel.

The quantitative analysis involves a detailed examination of the manager's performance track record. This includes understanding the manager's risk exposures relative to a benchmark, which is known as style analysis. There are two types of style analysis: returns-based and holdings-based. Returns-based style analysis is a top-down approach that estimates risk exposures from an actual return series for a given period. Holdings-based style analysis is a bottom-up approach that estimates risk exposures from the actual securities held in the portfolio at a point in time.

Due diligence also involves evaluating the costs and benefits of different investment vehicles, such as individual separate accounts and pooled or commingled vehicles. Additionally, it is important to consider the fee structure when selecting an investment manager. Fees may include management fees, performance fees, custody fees and commissions.

Overall, investment manager due diligence is a comprehensive process that aims to assess the skill and likelihood of future success of a potential investment manager.

Frequently asked questions