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Using Money Managers

© Kirk Lindstrom

Using Money Managers

This article was first posted by Rande in "Ask Rande" on February 4, 2001. I decided to edit it into an article here to preserve for the future.

Rande's Summary

Ignoring the debate between active management and indexing for a moment, and assuming you've dedicated some money to active management, the next debate revolves around the use of private money managers vs. mutual funds. For most, private money managers are beyond reach. Many of the good money managers have minimum balances ranging from $1 to $10 million and once you divide your portfolio between large growth and value, small cap, international, fixed income, etc. it's tough to meet those minimum balances by manager.

A number of good private money manager wrap programs have been developed where minimum access is much lower and the fees are quite reasonable (certainly well below what you would pay for the average mutual fund). The big advantage to private money management is tax efficiency; you start with a basis equal to your investment, you own the individual stocks and bonds in your separate account and so have greater flexibility if you want to pick up and leave or match gains and losses on individual securities, etc.

Even if you're not in the market for a private money manager, it's helpful to know the process, the advantages and disadvantages. "Using Money Managers" is an article from the January 2001 Journal of Accountancy dealing with the investment advisory business for CPAs in general and money manager selection in particular. Though it's written for professionals, I thought some might find it useful in evaluating the search and selection process as well as the business of independent investment consultancy (it's good to know what those guys are thinking). Some good AIMR stuff at the end too.

Article Excerpts

Thanks Rande! Below are some excerpts from the article that I thought are important to note:

The Value of Financial Advice

According to a 1998 survey:

• 85% of those who paid financial advisors say they are worthwhile.
• Planners (35%) and brokers (33%) are the most frequently used paid financial consultants.
• Nearly all consumers (92%) who use financial professionals are comfortable with their finances. Only 76% of those who do not use professionals make this claim.
• Financial comfort comes from long-term relationships. Clients who have used their professionals for less than one year are least comfortable with their finances. Clients with relationships of more than 10 years have a comfort index of 3.54 out of 4.

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