by Steve Fillingim
You wouldn’t entrust your health to someone who didn’t have a good track record and the necessary credentials and experience. The same care with which you choose a health professional should also apply to another important area of your life: your investment portfolio.
If you’ve worked with a Financial Advisor, you know how helpful it is to have a professional looking out for your accounts and keeping you on the right track with your investments. Sometimes it’s also beneficial to enlist the services of other investment specialists as well. One thing you may decide is to delegate some of the responsibility for actively managing a portion of your portfolio to a professional money manager. But where do you start?
The first step is to define your personal financial goals. Ask yourself: What are my current and future financial needs? What kind of return am I seeking? How much investment risk am I willing to accept to achieve this return? Once you’ve established these guidelines, consider the following:
Investment philosophy/style. Find out which type of investment style the money manager under consideration uses. Although firms may use several variations of investment styles, there are two general types of money management: value management and growth management. Value managers prefer to invest in undervalued securities whose fundamentals remain solid, whereas growth-oriented managers focus on the ability of a company to increase its earnings on a long-term and continuing basis.
Credentials. Start by determining if the manager is a registered investment adviser, because every money manager must register with the Securities and Exchange Commission. Also ask for a copy of the manager’s ADV form, which provides details about education, experience, investment style and any regulatory problems with the SEC.
Performance. Investment performance can be evaluated in a number of ways, including both short- and long-term. Ask to see quarterly or annual data, which may reveal a different conclusion about a manager’s performance than looking only at three- or five-year “average” returns. For example, a five-year average return may appear outstanding relative to other managers and to the market. On the other hand, quarterly data may reveal that much of the return can be attributed to just one or two exceptional quarters.
Service Capabilities. A manager should have a large enough staff to service existing clients and handle new account growth. You should also consider how the manager communicates with your Financial Advisor, including what types of reports are sent and how available the manager is for conference calls and account reviews.
Fees. Based on the size of your account and the manager’s performance, the management fee usually ranges between 1% and 5%. If your account fee exceeds this range, you should try to negotiate down the fee or receive a discount for exceeding the required minimum account size. For example, a two percent fee from a $1 million account will earn the manager more than a three percent fee on a $100,000 account.
There are literally thousands of money managers you can choose from, but a manager that fits your goals and objectives can be a valuable piece of your overall investment mix. As professional money management is not suitable for all investors, your Financial Advisor can help you in the selection process and find one that is most compatible with you.
This article was written by Wells Fargo Advisors and provided courtesy of Steve Fillingim, 1st Vice President of Wells Fargo Advisors. Further information can be obtained by calling him at (951) 699-1833.