Finding An Investment Manager

Scouting good investment managers Saving for your children's college costs
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There comes a time in the life of many entrepreneurs when they have more money than they know what to do with.

Not literally, of course: There are always plenty of claims on the purse. But if knowing what to do with your money means planning and carrying out a coherent investment strategy -- well, who has the time? Not, for the most part, people who spend their days running a business.

The people who do have the time are those who make a living at managing money -- and who will, for a fee, handle your investment portfolio for you. Most money managers, to be sure, prefer big institutional clients, or at least pension-fund-size portfolios. But a growing number are taking on individual accounts as well. And a lot of mid-range investors are beginning to think that a professional could manage their money more effectively than they could themselves.

What should you look for in an investment manager? To answer this question, INC. contacted a representative sample of an unusual group of individuals, who, for lack of a better name, might be called investment-manager talent scouts. The scouts don't handle portfolios themselves. Rather, they keep tabs on dozens, sometimes hundreds, of managers around the country, and will search out the one or two they think are most suitable for a client's investment needs. As might be expected, they have a set of criteria by which they rate the managers, and a set of recommendations for anyone looking for one.

* For starters, the scouts advise, don't confuse an investment manager with a financial planner. See a financial planner, if you want, for wide-ranging advice about taxes, insurance, retirement income, and how to put the kids through college. An investment manager's only job is to oversee your portfolio: to buy and sell stocks, bonds, and other assets. Most don't accept clients with less than $100,000 to invest, and some have even higher minimums. But if you are in that range -- and you don't have the time to watch your investments yourself -- you may be in the market for a manager.

* An investment manager won't do you any good unless he or she can bring in a return on investment significantly higher than you could get yourself. Most of the talent scouts look for average annual returns in the neighborhood of 20% from the managers they recommend. Douglas Brown, a broker with Advest, based in Springfield, Mass., who also functions as a scout, looks for a track record "in the high teens to the low 20s" over a 7-to-10-year period. George Daniels, a partner in Investment Direction Associates of Birmingham, Ala. -- a part of Robinson-Humphrey/American Express -- uses six or seven investment managers extensively who have earned from 16% to 27% for their clients over the past 10 years.

The 20% figure, of course, is no more than a rule of thumb and won't apply to managers who have navigated bear markets like that of 1973-74. And not all the managers themselves accept that percentage as a reasonable goal. "Anyone who says they can earn 20% over the longer term is selling snake oil," says Phil Byrne, president of Masco Investment Management Corp., a part of Keystone Massachusetts Group.

* Any reputable firm should be willing to provide you with a documented track record of its performance on all accounts under management. This record, moreover, should extend as far back as possible. "If they've been in business 10 years, look at the last 10 years," advises Ted Rosenberg, a vice-president of The Burney Co., an investment-management firm in Falls Church, Va. "If they've been in business 5 years, look back 5. If they've been in business only six months -- well, monitor them closely."

* Among investment managers, bigger is not necessarily better. Ralph Goldman, an investment consultant and scout with Shearson/American Express Inc. in Ft. Lauderdale, Fla., looks for managers with accounts totaling from $30 million to $200 million.Mike Stolper, an investment consultant in San Diego, likes those with accounts from as low as $20 million to as high as $500 million. Those managing a lot of money, the theory runs, can't give mid-range investors the personal attention they merit, and are more likely to rely on a professional staff rather than on a single manager. And a big firm doesn't have as much flexibility moving in and out of markets -- particularly small-stock, high-growth markets -- as a small one has.

* Look for a manager whose investment philosophy matches your own. It sounds like a truism, but putting it into practice requires some diligence. "they're all telling you different things, but it doesn't seem like it at first," says a Los Angeles accountant who conducted a search for a investment manager on a client's behalf. "You can't just say to yourself, 'This manager is going to give me a 20% return on my money.' It matters how he invests it." Some managers, for example, invest only in stocks and bonds -- or only in stocks -- while others are willing to put money into real estate or venture capital deals. Even among managers who focus on securities, there are likely to be differences. Bill Rice, president and founder of Anchor Capital Advisors Inc. in Boston, likes high-growth stocks, including high-tech companies. He also looks for deep-value stocks -- those companies overlooked or out of favor with other investors. Kenneth Gerbino, chairman of a Los Angeles investment-management company that bears his name, is a value-oriented manager whose emphasis is on more stable stocks.

* Once you have a manager, don't forget about him. The talent scouts, as part of the service they offer, monitor managers' performances closely, and recommend a change if the manager leaves the company or if performance drops off. "I literally look over their shoulders to make sure they're doing their jobs," says Goldman. He talks to his managers on the average of twice a week. You won't want to go that far, and there is really no point in trying to second-guess a manager's every move. But you should look at the track record every quarter or so, and if it is not up to snuff, let the manager know.

* If the performance is bad enough for long enough, fire the manager and find a new one. Not that you should switch immediately: "The best way to approach it is to tought it out, just as you do with your business," says Marilyn Cohen, a broker with the Los Angeles firm of Cantor, Fitzgerald & Co. "Just because you have a bad quarter doesn't mean your business is going belly up." But if a manager's performance is down for a year or so, look elsewhere. And if the person who has been handling your account leaves for a new job, don't automatically assume the management company will continue to do as well by you as it did in the past. You may need to launch a search all over again.

* How much should it all cost? Unlike stockbrokers, who earn their money on transactions, investment managers charge a flat fee. The fee usually varies with the size of the account. Ordinarily, it averages out at from 1% to 2% of assets on an annual basis. "You are paying the adviser for being independent," explains Mike Stolper. "There is no incentive for him to trade the account as there is with a stockbroker. And there is no correlation between how good an investment is and how much money the broker will make." If you want to use a scout, of course, you will have to pay him, too -- one way or another. Stolper and a few others work independently and charge a fixed rate for their services; Stolper's is a $1,500 one-time fee for finding an adviser, plus $500 a year for monitoring. Other scouts, such as Daniels, Goldman, and Brown, are connected to brokerage houses. Although they charge no direct fee for their services, they expect to make money on commissions from trades ordered by the managers they recommend.

What you pay, however, is less important than what you get for your money. "Entrepreneurs are so busy making money," laughs Marilyn Cohen, "that they sometimes forget about the money they have, which is sitting around doing nothing." If you can change that situation, it can't help but be a change for the better.

Note: This table may be divided, and additional information on a particular entry may appear on more than one screen.

TRACKING THE MANAGERS: ONE SCOUT'S RECOMMENDATIONS

(Average annual percentage return for portfolios under management)

Investment adviser 1975 1976 1977 1978 1979 1980

The Burney Co. 41.9 50.5 11.5 6.0 35.1 45.1

Wasatch Equity Advisors 26.2 26.0 21.1 38.8 53.6

Gerald Ray & Associates 42.1 47.1 3.0 14.4 29.3 49.6

Anchor Capital Advisors 25.1 29.4

Grace Capital 44.3 49.3 5.1 10.2 23.8 10.5

Shearson Management 33.6 17.3 -4.1 19.8 37.3 34.7

NorthWest Quadrant 14.9 19.9

TRACKING THE MANAGERS: ONE SCOUT'S RECOMMENDATIONS

(Average annual percentage return for portfolios under management)

1st

qtr. Annualized

Investment adviser 1981 1982 1983 1984 return *

The Burney Co. 8.4 31.3 47.0 0 +29.5

Wasatch Equity Advisors 5.3 22.3 20.0 -7.3 +27.7

Gerald Ray & Associates -1.7 21.2 24.8 -1.0 +25.0

Anchor Capital Advisors 3.9 30.6 23.4 -3.0 +23.1

Grace Capital .4 37.1 22.0 -12.7 +22.5

Shearson Management 19.4 45.5 10.1 n.a. +21.5

NorthWest Quadrant 6.8 26.6 22.0 -.7 +18.0

* Annualized returns do not include first quarter 1984 figures.

Source: Ralph Goldman, Shearson/American Express, Ft. Lauderdale, Fla.

Last updated: Jul 1, 1984




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