The money manager world is vast and there are literally thousands of managers and strategies. Of course they all want to tout their strategy. “We’re the best money manager for downside protection” or “Our top performing value strategy is pretty much the best out there.” They are after all in the business to make money.
Selecting a money manager is a decision that can impact your goals, family, lifestyle, retirement and more. Therefore knowing the basics of evaluating a money manager is crucial. We’ve outlined a few simple filters to put a money manager through when you’re considering hiring them.
We’re always perplexed at how many people we talk to have never adequately compared money managers. Many investors will have a couple of money managers they are considering, compare them to each other and hire one of them. That’s like comparing two baseball teams and saying the better one out of the two is the best in the league. What about the other 28 teams? With such an important decision it makes sense to compare against the other teams in the league. Our 4 Top Money Managers report highlights top performers in selected categories – take a look now!
We provide research and analysis of money managers for free to investors. Simply put, we do the work for you. Experience the expertise we can provide by requesting our recently released WrapManager Top Equity Money Manager Picks for 2011. This report highlights several money managers and provides detailed information on specific strategies they manage.
We specialize in researching and selecting money managers for our clients. Our goal is to deliver a fully customizable and diversified portfolio using our selected (and screened) money managers to each of our clients. Have us develop one for you by clicking here to get started with a few basic questions.
Choosing Your Money Managers
The first thing you’ll need to do is have a few money managers in mind. You may have heard about them through a friend, on TV, in the news or on the internet. Next, you need to gather the unbiased data on each. You can start by using our Money Manager Directory. We’re more than happy to provide you with strategy and performance information for free! Or let us choose managers for you and compare them against their peers!
How Long has the Money Manager Been Around?
Make sure the money manager and their specific strategy have been around long enough to establish a good track record. The key is to allow enough time to see how the strategy performs in various types of markets. Five years is good, ten years is better and more could be ideal. Be aware that even the best money managers can still have strategies that are just starting out. For example, a manager that has a top performing strategy going on ten years might have a different strategy that’s only two years old.
Verifiable Track Record and ‘Just Say No’ to Hypotheticals
President Reagan once said “trust, but verify.” Politics aside, we couldn’t agree more. Unfortunately there are individuals who fudge or distort their true performance numbers. There are standards in place for the calculation of performance data. Many firms claim compliance with Global Investment Performance Standards (GIPS), established by the CFA Institute. Choosing firms that are GIPS compliant allows you (and us) to compare money managers with data that ensures fair representation and full disclosure.
Strategies and money managers just starting out may present you a portfolio with hypothetical performance. It’s basically a portfolio they create today and then go back to see what the performance would have been if they started the strategy a few years ago. Just say no. While the intentions may be good and the investment thesis sound, it usually has not been tested in the real world for a long enough period of time.
Portfolio Manager and Management Team Tenure
Next take a look the people behind the company name and strategy. Do they have the experience and credentials to be managing your money? Would you trust someone with 25 years of experience or five years of experience? Also be sure that the individual(s) managing the strategy have been with that strategy for a while. A top performing money management strategy over ten years may suffer if someone new takes over the investment making decisions. Remember, the strategy is only as good as the people behind it.
Benchmark Outperformance in Various Types of Markets
Okay, the money manager, strategy and people behind the strategy all look good. They even adhere to the GIPS standards mentioned above. Sounds like you may have found a top money manager. Now let’s see how the strategy has performed. Make sure you compare apples to apples.
Comparing the performance of an international equity strategy to US Treasuries does not really tell us anything when looking for a top international equity manager. Instead, compare the strategy to its benchmark. You can think of a benchmark as the guideline to which a money manager is compared. A small cap growth strategy might use the Russell 1000 Growth index as a benchmark, which tracks the performance of small cap growth companies.
Be sure to take a look and see how the strategy did in various types of markets: bull, bear, flat, etc. The performance may surprise you. Be sure to read our “Chasing Past Performance” newsletter to see why it’s important to invest with a money manager who has a good track record in what you think the upcoming market environment will be like.
Controlling and Managing Risk
You want to be sure you’re taking the right amount of risk for the right amount of return. It’s not a smart idea to invest with a manager who takes a lot or excessive risk with your money to generate performance. It’s a good indication when a manager generates consistent returns while limiting the amount risk the portfolio takes as much as possible. There are various measurements of risk such as beta, standard deviation and the Sharpe ratio. The details of each are beyond the scope of this letter, but know that there are ways to measure risk. It is important to ask yourself two questions: 1) What is the minimum amount of risk I need to take to achieve my goals? 2) What is the most amount of risk I am comfortable taking?
Safety of Your Assets
Simply put, know where your money is being held and how it’s insured. Your money should be held at a custodian where the money manager only has investment authority and not the ability to withdraw or send funds without your permission.
For example, WrapManager client funds are held at Wells Fargo which acts as the custodian of the assets. Our clients then give their various money managers permission to only make investment decisions. Making a check out directly to a money manager should raise a red flag and call for increased due diligence prior to placing any funds.
SEC Registered and Good Standing
Depending on the level of assets under management, money managers and investment advisors should either be registered with the SEC or state registered. Most money management firms who manage a sizeable amount of assets will be SEC registered. You may find more information, including any disciplinary history about a firm by pulling up their Form ADV on the SEC.gov website. It is important to review the information contained on a firms ADV Part I and Part II.
Evaluate Against Peers
At this point, hopefully you have found a money manager that passes all of the above tests. Perhaps it has even been one of the best performing money managers based on your research. Congratulations, but you’ve still got a ways to go. You want a manager that’s not only legitimate but also at the top of its class. It’s time to compare your money manager with other money managers that have the same or similar strategy.
For example, there could be hundreds of strategies in the small cap growth asset class. Which perform well over the long term? Which do well in bull markets but fail to outperform in bear markets? You can see how this process can become daunting. But don’t worry - this is what we specialize in!
Monitor and Don’t Be Afraid to Fire
After you’ve selected and invested with what is hopefully a top money manager, be sure to check up on them at least on a quarterly basis. Are they performing well and beating their benchmark? Did the lead portfolio manager retire? Did they drift substantially away from their stated strategy? Depending on the answers to these questions, it may be time to review and consider switching money managers.
Solutions for You
In our experience, a money manager may do very well in one and maybe even two asset classes, but perhaps not across every asset class. It may be beneficial to utilize several money managers across different asset classes to build a well diversified portfolio.
Of course, this is just a small list of some items to be aware of when choosing a money manager. There is no fool proof way to ensure that a money manager will do well or will not lose money. But, having done your due diligence in the beginning can help you make informed decisions.
Let Us Do the Work For You
Using some of our recommended money managers, we’ll craft a customized and diversified portfolio with your financial situation and goals in mind. Once invested, we are here to help monitor the money managers and help you track your plan and progress. The process is simple and we are happy to help.
Discover how our process can help you and your family by answering a few short questions here.
Alternatively, you can talk to one of our Wealth Strategists right now by calling (800) 541-7774. We believe that at the end of the process, you’ll have the confidence and trust in WrapManger to allow us the pleasure of helping to manage your wealth.
The attached report and information have been prepared or produced by WrapManager, Inc. from sources and data believed to be reliable. Information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice, as an offer to sell, or the solicitation of an offer to buy any security in any states where such an offer or solicitation would be prohibited by regulations. WrapManager, Inc. is not a tax advisory firm. We recommend you contact your tax attorney or CPA prior to utilizing any of the tax-related strategies mentioned or discussed. Returns and experiences will vary for each client. Each client’s risk tolerance and investment objectives are unique to them. Past performance may not be indicative of future results. No assumption that future performance of any specific investment or product made reference to directly by WrapManager, Inc., on its Web site and in marketing materials, will be profitable or equal the corresponding indicated performance level(s). If performance numbers are generated gross of fees, a client’s return will be reduced by investment advisory fees and any other expenses. Opinions expressed are those of WrapManager, Inc. and are subject to change without notice and are not necessarily those of Prospera Financial Services, Inc., its directors, parent company or its affiliates. Securities offered through Prospera Financial Services and cleared through First Clearing, LLC. Prospera Financial Services - Member FINRA/SIPC.