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Today’s investors are bombarded with information and often hard sells when choosing firms and individuals to manage their portfolios. However, glossy marketing campaigns often tell only one side of the story.

What the brochures and emails don’t include are the answers to the hard questions every investor should ask when deciding who will manage their investments. It’s up to investors to educate themselves to ensure they’re getting the best advice and service for their money. However, doing the groundwork can be daunting. Sometimes it’s hard to know what the right questions even are. Here are some key topics to help you ask the right questions when selecting your investment manager.

Stability

Stability implies reliability and consistency, which ultimately guide to an organization to deliver results. A strong corporate culture motivates individuals to achieve a common goal. A potential manager should be able to articulate the firm’s corporate culture and business objectives.

Investors should also examine the turnover of an investment manager’s clients and staff, keeping in mind the potential negative impact higher turnover may have on long-term investment performance. While this can sometimes be challenging, it’s important to review publicly available information on an investment manager’s staff and client retention.

Investment Process

How does an investment manager define his or her investment process? You might ask whether they are growth oriented or value oriented. Do they have multiple strategies? Can the managers define their investment process easily and have they stuck to their process through all market cycles? Short-term performance pressures can influence investment decisions and cause a manager to revert to different investment styles to preserve assets under management.

A great investment manager is one who performs well even in down markets, adhering to his or her investment discipline, even though that style may be temporarily out of favour.

Transparent Fees

Fees are critical in evaluating investment managers. The premise is straightforward: the more you pay someone to manage your portfolio, the less is left for you. Given our challenging environment of low interest rates and equity volatility, it’s all the more important to improve potential returns by paying fewer fees.

A good starting point is to ask how the investment manager is compensated. Often compensation can reward the wrong types of behaviours. Look for managers who are transparent in their fee disclosure and charge a fee based on assets they have under management on your behalf. Find out if they are invested alongside you and in the business. If an investment manager is vested in their company and their own investment strategies, it demonstrates their interests are strongly aligned to yours.

Willingness to Manage Their Own Growth

Growth in the investment business is a measure of success. Ironically, this very success can inhibit an investment manager’s ability to deliver long-term performance results. The larger a firm becomes by focusing on growth of assets under management only, the smaller the subset of companies it can invest in to have an effective impact on the portfolio. Ultimately the portfolio being managed ends up looking more and more like the index. To beat the index you need to look different than the index. It’s important to look for managers who can recognize the impact that growth at an unmanageable pace can have on their firm’s performance and service.

Performance Presentation

How are the results of the investment manager presented? Short-term business pressures may cause managers to cherry-pick their best performing strategies to present to prospective clients. This can be avoided if managers present performance on a composite basis where past results are an actual representation of current and former client portfolios with similar risk profiles. Where possible, ask to see audited composites of performance for the manager you are interviewing.

 
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Jerry Koonar is vice-president and portfolio manager in the Calgary office of Vancouver-based Leith Wheeler Investment Counsel. This article is not intended to provide advice, recommendations or offers to buy or sell and product or service.