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There are many aspects to investing, and they can be overwhelming to those without a background in finance, economics, or business.
But, of course, investing is important for everyone, and you want to get started as soon as possible.
But what happens if you don’t want to spend all that time studying? Surely, nobody wants to make mistakes that would cost big money.
For those reasons, you might consider consulting a portfolio manager. In this article, we discuss the role of a portfolio manager, the value they can provide to you, and other alternatives to consulting a portfolio manager to reach your financial goals.
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What Is a Portfolio Manager?
A portfolio manager, or wealth manager, makes investment decisions and carries out investments on behalf of an individual or institution.
What Does a Portfolio Manager Do?
Portfolio managers are responsible for creating and maintaining a portfolio of investments for a client.
The process usually starts with the portfolio manager discussing their expected returns, risk tolerance, and time horizon with the client.
The portfolio manager might then provide a personalized plan and strategy for the client or have a crafted investment product that would suit the client’s profile.
The job of the portfolio manager is to meet the expectations of the client through managing investments.
A consensus between the client and portfolio manager comes in an investment policy statement (IPS) that contains the investment objectives and a predetermined investment strategy.
The portfolio manager will proceed to work their magic —conduct market research, provide analysis and make investment decisions on behalf of the client.
It is important to note that while it is their job to meet their clients’ objectives, most active investors do not consistently beat the market.
However, this depends on which index you look to as a benchmark. This is usually agreed upon between the client and portfolio manager before initiating any investments.
There are generally two strategies with investing: passive and active. A passive investor usually develops a portfolio that mirrors an index, while an active investor actively searches for investments that will outperform the benchmark.
Either way, you would be keen on looking for a portfolio manager with certain qualities. This includes how they conduct their research and have insight into the companies or funds they choose to invest in.
Arguably, the most important quality of a portfolio manager is how well they deal with clients.
As a client, you’d want someone who provides timely updates — to keep you in the loop whenever you request it.
It is also a fiduciary requirement for a portfolio manager to meet with the client at least once a year to ensure that the portfolio allocation remains aligned to their initial requests.
Portfolio Managers: Fees and Prices Explained
Management fees are often overlooked because they are presented either in complicated structures or appear to have deceivingly small percentages.
The percentage of management fees increases according to the degree of management. A portfolio that is more actively managed is associated with a higher management fee.
There are a few ways that management fees can be structured:
- Flat Management Fees: A fixed percentage of fees are paid no matter the selection.
- Flat Fees and Annual Management Fees: An additional fee imposed on top of a flat fee.
- Management Fees Assessed by Asset Class on Investment Balance: A percentage of fees are associated with the asset class invested. For example, portfolio managers may charge 1% of value invested equity, 0.5% value invested in bonds, and 0.1% of value in cash.
- Wrap fee: Instead of charging multiple fees for various services, a portfolio manager might package them all into a single fee, known as the wrap fee.
What is the Difference Between a Financial Advisor and a Portfolio Manager?
A financial advisor handles comprehensive financial goals that cover a range of topics beyond capital growth through investments.
Their role is to create plans to achieve financial goals beyond investing, such as retirement planning, risk management, personal finance, tax efficiency, and estate planning.
Like a portfolio manager, a financial advisor would create a plan according to what a client wants to achieve financially.
In addition, they may sell financial products, such as insurance and investment packages, to help achieve the client’s goals.
In contrast, a portfolio manager is solely focused on developing and managing a portfolio to achieve the client’s desired return on investment.
What Education and Licenses Are Required to be a Portfolio Manager?
The entry-level positions require an undergraduate certificate in finance, business, economics, or math and statistics.
So, naturally, having a master’s degree in finance or economics would put candidates in a better spot to become portfolio managers.
Most employers require portfolio managers to have a certificate in financial analysis. The most in-demand certification in the field is the Chartered Financial Analyst (CFA) designation.
To be qualified to take this certification, the applicant needs to have at least a bachelor’s degree and four years of related work experience.
The next tier of certification is the Certified Financial Planner (CFP) designation, which is most favorably looked upon among financial advisors.
The portfolio manager also might require licensing to manage certain assets. The Financial Industry Regulatory Authority (FINRA) regulates firms in the trade of managing assets. It typically requires the employer’s sponsorship to be qualified for the exams.
If the assets to be managed exceed a value of $25 million, the managers are required to be registered with the Securities and Exchange Commission (SEC).
Do Portfolio Managers Charge High Fees?
As mentioned, the more actively a portfolio is managed, the more a client is likely to pay in fees.
This is because it takes more resources to conduct research and execute transactions in an active management strategy.
Depending on the level of experience and tools, a portfolio manager may quote higher fees by making a point that they can provide better value than others.
They may also charge commission instead of a fee-based structure, which usually leads to paying more fees.
The client needs to do their research and discuss with the portfolio manager on their fee structure before going ahead with their services. Then, once agreed, ensure that the fee structure is written as part of the legal document.
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Alternatives to Portfolio Managers
- Online Financial Planning Services: Online financial advisors offer a more accessible and cheaper alternative to face-to-face advisors. Examples of platforms that you can access this service are Sofi, Betterment, and Wealthfront.
- Certified Financial Planners (CFP): A certified financial planner is a financial advisor who has undergone rigorous certification to provide financial planning services. These advisors are held to a fiduciary standard — the requirement of acting in the clients’ best interest.
- Chartered Financial Analysts (CFA): CFA is a professional who deals with the nitty-gritty of investment analysis. Their job includes collecting data, performing analyses, evaluating returns and risks on different investments, creating financial models and forecasts, and writing them on reports to present their research to their clients.
- Target-Date Funds: Target-date funds are designed to grow assets optimized for a specific time frame. These funds can be either mutual funds or ETFs. They are commonly used as part of retirement planning or children’s education fund.
- Robo-Advisors: The advent of technology inspired the creation of financial advisors programmed with mathematical rules or algorithms to give financial advice or investment management. They exist in applications such as SoFi Automated Invest, Betterment, Ellevest, and Wealthfront.
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Bottom Line: What Is a Portfolio Manager?
A Portfolio Manager is a professional whose primary role is to construct and manage a portfolio of investments on behalf of their client.
Their level of qualification depends on the certifications that they obtained. Depending on what kind of services you need, you might look out for specific credentials and proficiencies before you decide to hire one.