Your financial advisor/broker can help you with portfolio planning and carrying out the actual investing. He can suggest suitable purchases, but he cannot follow each and every client’s financial holdings on a daily basis.
That is where a money manager comes in. Financial planners encourage clients to hire a money management team to focus on their portfolios. A financial planner acts as a matchmaker and overseer, suggesting appropriate money managers, based on a client’s needs, goals, and risk tolerance.
Money management advisory firms use individual accounts (“Separately Managed Accounts” or “SMAs”) over which the managers have discretion. They trade securities within these accounts, and send reports of all transactions to the clients.
Many money-management firms have relationships with brokerage houses that allow smaller portfolios ($100,000–$250,000) to benefit from the same service larger accounts enjoy. After a money management firm is chosen, the financial advisor doesn’t fade out of the picture. Rather, he monitors the management firm’s activities and results, and if he is no longer satisfied they are meeting certain benchmarks, he may suggest a change to the client.
Doing due diligence with money managers includes examining:
Investment process. The manager should have a definable strategy that is clearly stated and followed.
Meeting client diversification needs. Can the managed account professionals tailor portfolios to avoid inappropriate concentration for the client’s needs?
Manager’s track record. Is the management team adding value to the client’s portfolio
Tax efficient management. When do taxable trades occur? Can the managers accommodate client request to sell in order to realize capital gains/losses at the right time?
Perhaps the most important job a financial advisor has is helping clients understand the reports they get from the money managers. Your financial advisor is your partner in giving explanations you might need as you monitor your account. You can learn more about separately managed accounts in a 9-minute video tutorial I created at www.profile-financial.com/videos.
Douglas Goldstein, CFP®, investment advisor, is the co-author with Grandmaster Susan Polgar of Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published November 5, 2014.