This article has been written and provided by UBS Financial Services Inc. for use by its Financial Advisors.
(Part 1 of 2)
As individuals move closer to retirement and the consequences of investment error grow larger, you may want to consider using the services of a professional money manager.
Yet, with more money managers than individual stocks traded on the New York Stock Exchange, it can be a challenge to sort through the crowd and find the manager(s) that best meets your needs.
Selecting the right money manager begins with asking some very important questions. Do the securities and instruments this manager trades fit my objectives and risk profile? Is the manager's past performance the result of skill, or luck? When can out performance be a danger signal? How will multiple managers work together to reduce risk, or do they overlap?
Analysts who do this for a living usually employ a methodical, consistently applied process that share certain common steps:
1. Identify Candidates—Typically, a money manager database will be utilized to find managers that meet certain criteria (e.g., asset class, investment style, performance minimums). For instance, in the case of mutual fund managers, there are several software tools that may be used by the individual investor.
However, the software programs used for a broader universe of money managers are not priced for individual use.
2. Collect and Analyze Information—Once a manager passes the initial screen, a manager is usually asked to complete a detailed questionnaire that covers all aspects of its investment philosophy, process and research capabilities, as well as its key personnel and management and corporate structure.
3. Understand the Manager's Investment Philosophy and Process—There is as much art as there is science to manager selection. Accordingly, you need to go beyond the numbers and get a better understanding of the people, processes and philosophy of those actually managing the money.
4. Verify and Build Conviction—Should a manager pass these first three steps, it's time to bring them through an extensive due diligence process. This is a process of "kicking the tires" which may involve on-site visits, sitting down for an extended time with the portfolio managers and traders, understanding their business continuity plans, among other things.
5. Committee Vetting—The results of this in-depth research and due diligence is often then presented to a committee of senior professionals whose experience and distance from the actual process allows them to ensure internal policies were followed and comprehensive and critical due diligence was performed. Tough questions are asked to ensure that the analysts have done an exhaustive job.
In my next article, I will discuss those criteria that we believe make an excellent investment manager.
Randall V. Brewster John G. Brewster
Financial Advisor Senior Vice President-Investments
Portfolio Manager, Senior Portfolio Manager,
Portfolio Management Program Portfolio Management Program
UBS Financial Services Inc.