Last week, we talked about what independent asset managers are, and what they can do for you.
Large asset management firms score over their smaller competitors on several counts. The in-house portfolio management expertise that a client will have access to will usually be stronger. In addition to this, it is likely that an independent asset manager that has assets under management of several billion dollars will have access to a wider range of products and investment options.
But you should not restrict your choice only to those firms that have many clients and which manage a large book of clients monies. You may do equally well, or even better, with a small firm.
Why is that? Firstly, if your portfolio is small relative to the size of the firm, your account may not get the attention that it deserves. The advice that you receive may not be personalised. This could result in your funds being allocated in a manner that doesn’t match your risk profile or your needs.
The approach that you should adopt is to have an open discussion during your initial meeting with the representatives of the firm. First, determine if you are engaging them for a discretionary or advisory mandate and how well their model portfolios have performed. Ask them to clarify how the communication process will work and if their senior staff will be accessible. The decision to sign up should be taken only after you receive a satisfactory response to your queries.
2. Range of Services
An independent asset manager can offer several types of services. Obviously, asset management will be the core activity. This will include building an investment portfolio consisting of equities, fixed-income securities, forex, exchange-traded funds (ETFs), mutual funds, commodities, and structured products.
You may also be able to get access to direct investment opportunities and alternative investments. Many asset managers also offer additional services that include retirement planning and family office services, and can engage the services of trusts specialists and tax advisors if you require.
It’s likely that you will need only some of the services offered. When you choose an independent asset manager, you should ensure that you select one that has expertise in the relevant areas that are of interest to you. Don’t make the mistake of thinking that the firm that offers the widest range of services will be best able to meet your needs.
In fact, a specialised manager who offers a limited range of services, but who has a high degree of expertise in your targeted activity, may be the most appropriate choice.
Regardless of the size of the firm or the number of different services on offer, there is one distinct advantage of dealing with an independent asset manager. You will receive objective and unbiased advice regarding the type of securities that you should purchase.
Additionally, the purchase and sale transactions, and the custody of the securities thereafter is separated from the portfolio management activity. This gives the asset manager the freedom to select the most efficient securities brokerage firm or bank custodian for you.
3. Investment Approach and Strategy
It is absolutely essential that the asset manager you deal with understands your consolidated asset holdings, which could be spread over several private banks and accounts. What are your specific instructions regarding your portfolio? Is asset preservation your primary goal or are you willing to take on a high degree of risk to earn a greater rate of return on your investments?
Ideally, your independent asset manager should provide you with a comprehensive document that gives details about the investment strategy that you have agreed upon. It is then up to the asset manager to ensure that there is no deviation from the principles that have been laid down.
But clients need to play a crucial role in this process. Keep a tab on how often securities are sold and purchased in your account. If the portfolio is being churned rapidly, you should ask for an explanation. Each sale or purchase of securities incurs transaction costs. These can add up over a period of time and have a negative impact on your returns.
Of course, you can’t avoid transaction costs and it is inadvisable to limit these if the market situation requires a portfolio rebalancing or calls for a particular security to be sold. It may well have been the sensible decision to exit from an investment that was performing poorly and reinvesting the proceeds.
But a high turnover may be a sign of a short-term approach, and it is definitely worth discussing this issue with your asset manager. When you are in the process of interviewing prospective asset managers, you should definitely raise specific questions such as the percentage of your portfolio you can expect will be churned each year, as well as the transaction costs involved.
4. Minimum Investment Amount and Portfolio Performance
Most independent asset managers stipulate a minimum investment amount that is in the range of US$1 million. Try and ensure that you are not among the firm’s smallest clients. This may mean that your account could get a lower degree of attention.
After you have identified the firms that meet your investment amount criteria, it’s time to narrow down the list by concentrating on the performance of the asset managers. Ask the shortlisted firms to provide you with their model portfolio performance data for clients that have a similar risk profile as yours.
Of course, they will redact the name and other details that could identify the client. But the information that you are provided with will help you to estimate the capabilities of the asset manager. Try and ask for performance reports that provide data for an extended period. Five years or more is ideal.
It’s also important that you don’t view the asset manager’s model portfolios in isolation. Compare the performance with similar risk strategies and the market. For example, if a broad-based stock index increased by 20% over a certain period, the asset manager’s performance should be compared with this.
Although the amount that you will have to pay in fees should definitely be an important consideration when choosing an independent asset manager, it should not be the deciding factor.
Where the Independent asset manager fee model can be extremely attractive to the client is when the fees are charged on a fixed fee basis, usually a percentage of the Assets under Management (AuM). This fixed fee could be in the 1% range, but that’s not a universal rule. Fees could be lower for large accounts.
There is much discussion around retrocession fees that are typically paid out of clients’ monies. These are finders fees that product distributors pay to asset managers. Be sure to ask the IAM how they report earning from this these retrocessions, rebates or trailers. If the IAM passes through these fees back to the client and only charge a flat fee, you stand to benefit from a true alignment of interest.
If you find an asset manager who ticks all the boxes, but is relatively expensive, bear in mind that the superior performance of their proposed portfolio can outweigh the negative impact on your returns from the higher fees that you are charged.
However, there is one precaution that you must take. Ask for a statement of charges before you sign up. This will ensure that you don’t get any unpleasant surprises. It could also help you to choose between two asset managers who seem to be equally matched.