Selecting the right manager for your money can have a powerful impact on the preservation and growth of your assets. The best and the brightest managers consistently reward their investors with appropriate rates of return for the risk incurred.

Investors face an overwhelming array of choices in deciding how and where to have their assets professionally managed. Unfortunately, few investors spend adequate time or effort in evaluating those who will steward their hard-earned assets.

So how does one separate the truly talented from the wannabes and go about locating and choosing a competent money manager?

The Search Process

To come up with a list of candidates to consider as your investment manager, your business associates, financial contacts, legal and accounting professionals, and family or friends can supply you with ideas to begin your search. The internet also offers endless search possibilities.

To most investors the most visible and alluring initial attraction is a dazzling record of performance. But as beauty is only skin deep, outlandish performance can be fleeting. Perhaps the last thing you should consider about a money manager is their past performance.

Let us assume that your search has uncovered a few promising candidates. To achieve a comfort level that will make you feel good about investing your nest egg with a manager, you should be prepared to do some important homework. Failure to do so can be costly.

When considering a manager’s suitability to shepherd a portion of your assets, there are three primary areas of concern that need to be addressed: the logic and reasoning of the strategy and the sustainability of its return profile; the integrity of the manager; and the way the manager runs money. Investors often commit substantial funds to a manager having done little or no homework in any of these areas. Even the most elemental evaluation process will often raise questions and concerns that either downright preclude an investment, or at least require further clarification. The following list of considerations (by no means complete) provides a good starting point.

Investment Strategy

In our age of specialization, it is important to understand the strategy the manager is pursuing and to gauge his ability to implement it profitably in any market environment.

Economic rationale. Is the strategy understandable to you? Why does a risk-reward benefit exist?  Hopefully, it involves an inefficient market in which the manager has a definable “edge” through a unique legal, accounting, operating or research capability.

Experience. How experienced is the manager in implementing his strategy? Does the manager have an established record?

Size constraints. Is the strategy capable of employing ever increasing amounts of capital efficiently?  How has the performance record tracked the growth of the manager’s assets?

Taxability. Every strategy carries with it its own level of tax consequences. With significant difference between short-term and long-term capital gains rates, it is prudent to consider after tax rates of return when comparing the attractiveness of various strategies.

Risk control. What environment is most/least favorable to the strategy? How does the manager take advantage of favorable conditions and how might that approach change in bad times?

The Manager

Integrity counts. You need to be comfortable that the manager and employees are people of integrity. A background search and due diligence is a necessity.

Get to Know the Manager. Understand and ask about the organization. Is the organization appropriate for the level of assets managed? Have the principals been managing money together for many years competently?

Performance. Is the performance record he is touting really his? Exaggerated performance is as prevalent in the investment business as the common cold.

Information flow. Is information provided easily? If the manager is not tolerant of your need to understand his investment process before you invest – avoid that manager.

Consistent message. Since hindsight is 20/20, request and read past client correspondence. Does the manager do what they say? Do they admit when they are wrong?

Idea generation. What are the research sources? Where do ideas originate and what is the in-house procedure that culminates in an investment? 

Personal commitment. How much does the manager and his team personally invest? What other investments do they have?

Motivation. How hungry is the manager? Are they a committed investor or merely an asset gatherer? Does motivation and energy level indicate continued engagement in the day-to-day grind of asset management? Focus and dedication are prime determinants of success in the managed money arena. 

How is Money Run

Many managers come from an institutional background or organization, and unfortunately perpetuate that style when managing assets.

Cash. How does the manger view holding cash? Cash should be a function of lack of suitable investment opportunities. A manager should be willing to hold cash, pending attractive opportunities.

Concentration. How many positions does the manager own in the portfolio? As you are not buying into an index fund, you want only the managers’ best ideas in your portfolio. Most managers cannot intimately understand more than 20-30 investments at any one time.

Turnover. A manager who turns over his portfolio more than once per year likely has little conviction in the investments and is probably trading your money tax inefficiently.

Post Investment Monitoring

The above list of considerations should provide a good starting point for your investment manager evaluation. However, as long as funds remain invested, monitoring results should be an ongoing process.  Organizations, styles, strategies, and assets under management are constantly evolving and a manager must anticipate and adapt to the changing environment to continue being successful. The following considerations are signposts to potential further action once you have made an initial investment.

Consistency. Are quarterly reports, and other client correspondence on time and consistent with what you believe to be normal operations?

Accessibility. In a stressful investment climate, is the manager, or a top lieutenant, available to answer your concerns and questions?

Continued focus. As assets grow in the wake of good performance, does the manager remain motivated?

Style drift. Have you been surprised by anything the manager has done or said? Surprises often indicate a straying from stated strategies. More money has been lost through style drift than by any other single cause.

Comfort factor. Are you getting what you thought you were buying? Are you comfortable? If you are not, the manager should be able to dispel your discomfort, or you should consider terminating the relationship.

In Summary...

Selecting a capable money manager is more than a one-time task; it’s an ongoing commitment that requires careful initial selection and regular monitoring. While no approach is foolproof, doing your homework on a manager’s strategy, integrity, and practices significantly enhances your ability to make a sound choice. Remember, this is about more than numbers—it’s about ensuring that the person you trust with your hard-earned assets has the acumen and discipline to manage them effectively over time. Stay vigilant, stay informed, and prioritize your comfort and confidence in the relationship. The right manager will stand the test of time, proving to be a true steward of your wealth.

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