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 your investment portfolio has grown too large to manage by yourself, you may have decided to delegate the responsibility 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. Money managers may also manage fixed income, international or small-capitalization stock portfolios. By managing various types of portfolios, money managers offer the expertise to manage most sections of your overall asset-allocation strategy.
Credentials: 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. This will show you the experience of the key decision makers at the money management firm as well as give you a better understanding of their backgrounds.
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. When making performance comparisons make sure that you are comparing them to the appropriate market index over the appropriate time periods. This ensures that you are making a true comparison of each money manager's performance. For example, comparing the performance of a fixed income money manager (one managing a bond portfolio) to the S&P 500 (a pure stock index) will not give you an accurate picture of the manager's performance.
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 consultant, including what types of reports are sent and how available the manager is for conference calls and account reviews.
Fees: A money manager charges fees based on a percentage of your assets under management. This fee can range from 0.50 to 0.75 percent.
There are literally thousands of money managers you can choose from. Your financial consultant can help you in the selection process and find one that is most compatible with you.
Steve Zeller is a financial consultant with A. G. Edwards & Sons., Inc., member SIPC, 379 Lytton Ave., Palo Alto 94301. The number is 326-5010.