What Is a Money Manager? — Comprehensive Guide
Key takeaways
– A money manager (also called a portfolio, asset, or investment manager) professionally selects, monitors, and trades investments for individuals or institutions to meet stated financial goals. (Investopedia)
– Managers typically charge an annual management fee (commonly 0.5%–2% of assets under management) and sometimes a performance fee (typically 10%–20% of profits). Example: a 1% fee on a $1,000,000 portfolio = $10,000 per year. (Investopedia)
– Use a manager for expertise, access to research and investment opportunities, time savings, behavioral discipline, and fiduciary alignment. Monitor performance versus agreed benchmarks and review fees and conflicts regularly. (Investopedia; U.S. Bureau of Labor Statistics)
What a money manager does
– Defines an investment strategy aligned to a client’s goals, time horizon, and risk tolerance.
– Constructs and implements a portfolio (asset allocation, security selection).
– Monitors positions, rebalances, and executes buy/sell decisions.
– Manages risk, liquidity, taxes (to varying degrees), and reporting.
– Provides client reporting, performance measurement, and periodic reviews.
– May operate on a discretionary basis (manager makes decisions without prior client approval) or non‑discretionary basis (manager recommends trades; client approves).
How a money manager typically works — step-by-step
1. Client intake and discovery: gather goals, time horizon, liquidity needs, tax situation, and risk tolerance.
2. Investment policy statement (IPS): formalize objectives, constraints, benchmarks, and permissible investments.
3. Research and portfolio construction: use fundamental/quantitative analysis, sector expertise, and risk modeling to build the portfolio.
4. Implementation: place trades, establish positions, and set cash levels.
5. Ongoing monitoring and rebalancing: track performance, risk exposures, and make tactical or strategic changes.
6. Reporting and review: provide periodic performance reports and meet with the client to reassess goals.
Why use a money manager
– Expertise and credentials: many managers hold professional designations (e.g., CFA) and industry experience that help in company and sector analysis.
– Resources and access: institutional research, executive access, analytics, and advanced modeling tools unavailable to most individual investors.
– Time savings: outsourcing day‑to‑day investment decisions.
– Behavioral coaching: helps avoid emotional mistakes like panic selling or chasing rallies.
– Alignment of interests: fee‑based managers paid on assets under management are typically incentivized to grow client assets rather than maximize commissions.
How money managers are paid
– Management fee (asset‑based): commonly 0.5%–2% per year depending on firm, strategy, and AUM. Example: $1,000,000 x 1% = $10,000/year. (Investopedia)
– Performance fee: often used by hedge funds and some active managers; typical range is 10%–20% of profits above a specified benchmark or hurdle. Example: 10% performance fee on a $250,000 profit = $25,000. (Investopedia)
– Other fees: fund expense ratios, trading costs, custody fees, and third‑party fees may apply.
– Compensation alignment: fee‑based (AUM) models reduce commission conflicts; discretionary managers owe a fiduciary duty if so agreed.
Median pay context
– For context on industry compensation, the U.S. Bureau of Labor Statistics reported a median annual salary for financial managers of $134,180 (May 2020). This figure helps explain the cost base for skilled investment staff. (U.S. Bureau of Labor Statistics)
Real‑life examples
– Large firms that accept retail funds: Vanguard, PIMCO, J.P. Morgan Asset Management. (Investopedia)
– Famous individual managers: Warren Buffett (Berkshire Hathaway), Bruce Berkowitz (Fairholme Fund). (Investopedia)
Practical steps to hire and work with a money manager
1. Define goals and constraints: write down objectives, time horizon, cash needs, tax situation, and liquidity constraints.
2. Determine the level of discretion you’re comfortable giving: discretionary vs non‑discretionary.
3. Set a target level of AUM and minimums: many managers/firms have minimum account sizes.
4. Search and shortlist candidates: seek referrals, compare firms, and use registries (SEC Investment Adviser Public Disclosure, FINRA BrokerCheck).
5. Check credentials and regulation: confirm registrations (RIA, SEC/state), licenses, and designations (CFA, CFP). Review ADV Form 2 for conflicts and disclosures.
6. Interview and request documentation: ask for an IPS template, sample reports, fee schedule, and references from comparable clients.
7. Understand fees and total cost: get a full breakdown (management, performance, custody, trading, fund expenses). Ask for an example showing net return after fees.
8. Clarify custody and trade execution: ensure third‑party custody (e.g., a broker/dealer or custodian like Schwab/BNY Mellon) to avoid custody conflicts.
9. Agree on benchmarks and reporting: set performance benchmarks, reporting frequency, and acceptable risk metrics.
10. Start with a pilot or phased implementation (if possible): consider transferring a portion first.
11. Monitor and review: perform quarterly/annual reviews, compare rolling returns and risk‑adjusted metrics, and revisit strategy after major life or market events.
12. Know exit terms: ensure clarity on notice, transfer procedures, and any termination fees.
Key questions to ask a prospective money manager
– Are you a fiduciary for this account? If so, what does that fiduciary duty cover?
– How are you compensated? Show me a full fee schedule and an example of net returns after fees.
– What is your investment process and decision‑making structure?
– What benchmarks will you use and how will performance be measured?
– How often will you report and meet with me?
– Who will have daily responsibility for my account?
– How do you manage conflicts of interest, trade allocation, and best execution?
– Where will my assets be custodied?
– Can you provide references and audited performance records for similar mandates?
Comparing fees — simple examples
– Management fee illustration: $1,000,000 portfolio returning 8% gross = $80,000. With a 1% management fee, client net = $70,000 (7% net). Over decades, even small fee differences compound, so fee negotiation matters.
– Performance fee illustration: Fund returns $250,000 profit. 10% performance fee = $25,000 to manager; client net profit = $225,000. Ensure you understand hurdle rates, high‑water marks, and whether fees are taken before or after expenses.
Monitoring performance and risk
– Use time horizons and appropriate benchmarks (e.g., a blended benchmark for multi‑asset portfolios).
– Evaluate risk‑adjusted measures: Sharpe ratio, volatility, maximum drawdown, and tracking error.
– Look at rolling period returns (1-, 3-, 5‑year) and longer‑term performance.
– Ensure transparency in reporting (positions, turnover, realized/unrealized gains, fees charged).
– Have scheduled strategy reviews and ad hoc check‑ins after major market events.
Red flags to watch for
– Lack of fiduciary commitment or unclear written duties.
– Non‑transparent fee schedules, or heavy reliance on commissions.
– Promises of “guaranteed” or consistently extraordinary returns.
– No independent custody of client assets.
– Poor communication or inability to provide audited performance and references.
– High portfolio turnover without clear rationale (can indicate excessive trading to generate commissions if the manager is not fee‑only).
Conclusion
A professional money manager can offer expertise, resources, and disciplined investment management that many investors cannot replicate alone. However, the value you receive depends on finding the right fit: clear objectives, transparent fee structures, independent custody, documented processes, and ongoing accountability. Follow the practical steps in this guide to vet, hire, and monitor a money manager effectively.
Sources
– Investopedia. “Money Manager.” Accessed Nov. 25, 2021. https://www.investopedia.com/terms/m/moneymanager.asp
– U.S. Bureau of Labor Statistics. “Financial Managers: Pay.” Accessed Nov. 25, 2021. https://www.bls.gov/oes/current/oes113032.htm
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