A money manager is a person or entity that manages the financial assets of a portfolio for individuals or institutional investors. Money managers may also track expenses and investments, create budgets, and evaluate taxes.
Money managers can adopt varying goals for their clients, including ensuring the safety of the principal, maximizing returns, or seeking value or growth investments. Clients pay money managers a fee for their services, and in turn, money managers have a fiduciary responsibility to choose investments with their client’s best interest in mind and without taking on unwarranted risks.
Additionally, money managers may have access to areas of the capital markets that clients may not have, or they may have access to such areas at a cheaper premium. Money managers can be found in traditional financial institutions at all levels of banking, including retail.
Money managers are also present in the form of hedge funds, pension funds, private equity funds, or mutual funds; almost all buy-side firms have a money management aspect. Some famous money managers include Warren Buffet, Charlie Munger, and Peter Lynch.
How Do Money Managers Operate?
For a fee, money managers provide money management services to clients. Money managers can either create a customized portfolio of investments for each client or maintain a set fund that clients can buy into. The former of the two is more common in retail banking, whereas, the latter is more common in large-scale money management like mutual funds or hedge funds.
Compensation for money managers can also vary. Some money managers only charge either a one-time fee or a periodic one. Other money managers charge a commission-based fee, i.e., 20% of profits.
However, more commonly, money managers charge either a fixed fee and a variable fee. A common fee structure is the 2 and 20; it is where a 2% fixed fee of the assets under management are paid and 20% of profits are also paid as a commission. Some argue that the commission-based fee increases the incentives of a money manager to maximize the returns of the investor and may decrease any moral hazard that may occur.
Portfolio Management for Money Managers
Based on the type of fund or management style, money managers will exercise different portfolio management schemes to optimize their goals. Money managers in mega-funds, like the Canada Pension Plan Investment Board, are very diversified among many asset classes, including equities, fixed income, real estate, infrastructure, and private equity.
However, money managers solely focused on increasing returns may make investments in more risky assets to maximize returns. Whereas, a retail money manager would collaborate with their client, understand their goals, understand their risk adversity, and create an investment portfolio.
It should be noted that as economic data is released and more information is known, money managers will change their portfolios to suit their goals in the current economic climate. It should also be noted that since the money manager has a fiduciary responsibility to the client, the changes should be made in the best interest of the client.
Other Functions of Money Managers
Money managers may also provide research, or their institution’s research, on the capital markets and economy. The research can be very helpful for an investor to understand some of the decisions a money manager would make regarding investments.
Market research can help investors understand what they are looking for in the current market and help make important decisions, i.e., if they would like to be risk-on or risk-off. Additionally, money managers may provide tax advice for their clients to help them keep most of their realized gains through the money management service.
Why Should You Hire a Money Manager?
Money managers can be incredibly useful for people who are not professionals working in capital markets or finance. Managing money can be very intimidating, especially if one plans on doing it through the capital markets.
Also, there can be a lot of risks when investing money in the capital markets. As money managers have a fiduciary responsibility to their clients, it provides a sense of safety that the money that is being invested is in good hands.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: