How to pick a money manager

Clearing up the confusion

The term Money Manager, along with “Money Advisor” and “Financial Advisor” (or "Adviser") are often used interchangeably to define a trained professional who provides advice and counsel on matters that include financial decisions, tax preparation, financial planning and retirement.

A Money Manager should be totally objective about the relative benefits of any particular tool or instrument. He should first obtain a thorough understanding of your personal financial situation and goals, and then make a series of recommendations. A Money Manager should not come into the process with a built-in bias towards insurance, stocks, or any particular strategy.

Having said that, we note that many Money Managers have specific strategies that they have developed over time, and which they should be forthcoming about when you interview them – which of course you need to do. For example, a Money Manager may not like whole insurance, and will encourage you to buy protection only from a term life policy.

Money Managers are generally hired when an individual or a couple has reached the point where they are earning significant income, and have come to the conclusion that managing it is beyond their skills, the amount of time they have available, or some combination of both.

A Money Manager will sit down with his client and review the totality of their financial situation. That may include current and future income, your insurance needs, and the possibility of inheriting funds. He or she will also speak to you about your risk tolerance, which is critical to putting together an investment plan you can live with.

There is a range of professional training and accreditation that financial advisers must meet, and anyone thinking about engaging one should do some homework about these different levels. The distinctions between types of advisers are often based on the products they are licensed to sell. For example, an adviser who sells insurance must pass a series of exams in order to earn their license. And even within the world of insurance, there are different levels of expertise; for example, a CLU – or Chartered Life Underwriter – is the highest distinction that can be achieved.

While financial advisers are supposed to be neutral in their approach to your planning, there are some who believe that someone who comes from an insurance background is more likely to use insurance products as a tool, and someone with an investing orientation is more inclined to use investing instruments rather than insurance to achieve the same goal.

So it’s important to consider the totality of a Money Manager’s experience and background before making a decision about engaging one. Of course, fee structures are important as well; there are different kinds of relationships, and there are pros and cons associated with each.

Some Money Managers work on a commission-only structure. They earn their fees from transactions, whether they be stock trades or the purchase of insurance. Many believe that these relationships can lead to a conflict of interest, because the Money Manager is encouraged to make trades or engage in transactions solely to generate income.

Some are fee-only, which is just what it sounds like. That can be an hourly fee, a percentage of assets under management, or another structure. Finally, some Money Advisors work on “fee-based model,” which is a combination of fee and commission.

The Internet is creating new platforms for investors to find financial advice, just as it is creating new opportunities in other areas. Some of these innovations go beyond the conventional Money Advisor structure. One example of that is Covestor. We have collected expert money managers from around the world in a single place. Potential investors can find a manager who is best suited to meet their financial goals, based on investing strategy and risk tolerance.

With the Covestor platform, an investor can look into a money manager’s entire track record; interestingly, traditional advisers rarely if ever provide a client with that access. Once an investor finds a manager they like, an account is established and the investor’s portfolios is “synched” to the manager's, so it mirrors each trade.

Whatever decision an investor makes, it is important to fully understand the implications, the costs, and ability to end the relationship without undue cost or complexity. For further reading on this topic, check out our CEO's blog post on how investors should pick money managers.

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