Questions To Ask Before You Hire A Professional Money Manager

What do you do with an old boat other than use it to decorate a parking lot.

What To Look For When Selecting A Money Manager

In The Investment Answer, authors Daniel Goldie and Gordon Murray pose five critical decisions facing investors.  Decision #1 is – The Do-It-Yourself Decision.  Will you manage your own portfolio or turn it over to a professional money manager?  Before you make this decision, be sure to read Richard Ferri’s book, The Power of Passive Investing.  Go slow before you decide to fork over 90 to 100 basis points every year for “professional” management as their track record of money management is not all that sterling.  Also read a copy of William Sharpe’s, The Arithmetic of Active Management. One of my good friends once told me, “Day-traders don’t need estate planners!”

Here are a few questions I would ask someone I am about to trust with my portfolio.

• What are some example securities you include in a portfolio?
  • Are they individual stocks or are they mutual funds?
  • If mutual funds, are they non-managed index funds?
  • Do you ever build portfolios using Exchange Traded Funds (ETFs)?
• Do you provide quarterly reports showing the Internal Rate of Return (IRR) of the portfolio?
  • Do you benchmark portfolios and if so, what benchmark(s) do you use?  If the answer is, the S&P 500, be on your guard.
• What risk measurements do you use with a portfolio?  Expect to hear them say the Sharpe Ratio and better, the Sortino Ratio.
• What is your certification? Is the manager certified?  In “The Bogleheads’ Guide to Investing” there are nearly two pages of professional designations.  Look for someone who has passed the Certified Financial Planner (CFP) exam.

While I am a strong advocate of “do-it-yourself” investing, there are situations were a money manager is useful.  How does one select a manager?  Here are a few suggestions.

1.  Seek a trusted friend and ask them who they use as a money manager.

2.  Don’t use a stock broker as a money manager.  There is a conflict of interest between giving advice and selling stock or actively managed mutual funds from the brokerage house.

3.  Look for a fee based only manager.

4.  If the manager is going to charge a percentage of the money managed, check the rate schedule.  The larger the amount of money under management, the lower the percentage.  Be wary if the percentage exceeds 50 basis points or 0.50% per year.  If the fee is 90 or 100 basis points understand that this drag on the portfolio almost insures the portfolio will not outperform the total stock market.

5.  As mentioned above, know what kind of reporting is provided?  If the manager is unable to provide Internal Rate of Return (IRR) results for the portfolio, look elsewhere.

6.  Ask the money manager what they are using as a portfolio benchmark?  Is the benchmark customized to fit the portfolio?  If not, why not?

7.  Will the money manager work with you to build a portfolio that will meet your risk requirements?

8.  Before you hire a money manager, read a few of the Top Ten Investment Books recommended by ITA Wealth Management.  Note that the books I recommend have a bias toward index investing vs. active management or the selection of individual stocks.

Disclaimer:  I am not a professional money manager.

Lowell Herr