Financial Advisor Insights

How to Find a Good Investment Manager: 10 Must-Have Traits and 5 Red Flags

How to Find a Good Investment Manager: 10 Must-Have Traits and 5 Red Flags
March 4, 2024

Choosing an investment manager to handle your wealth and investments is one of the most important financial decisions you can make. You are entrusting your hard-earned money to someone, hoping they have the skills and knowledge to grow your assets.
But not all investment managers are created equal. An excellent investment manager can help your money compound over time, while a poor one can erode the purchasing power of your savings.
So how do you find a good investment manager you can trust? This guide will walk you through the entire process, from understanding the different types of managers, to the must-have traits that set the top managers apart, common red flags to watch out for, and key questions you need to ask any prospective manager.

What Does an Investment Manager Do?

An investment manager is an individual or firm that handles investing activities and portfolio management on behalf of clients 6. Their primary responsibilities include:

  • Developing investment strategies
  • Researching and selecting investments to buy and sell
  • Executing trades to build well-diversified portfolios
  • Monitoring portfolios and adjusting asset allocation
  • Reporting investment performance and holdings
  • Meeting with clients to understand goals and risk tolerance

The best investment managers not only have extensive knowledge of investing and markets, but also understand how to match portfolios to each client's unique financial situation and goals.

Types of Investment Managers

There are several types of professionals that can manage investments:

  • Financial advisors provide generalized financial planning advice plus investment management. They may also handle tax, retirement, estate and insurance planning. Wealth managers specifically work with high net worth individuals. They deliver a high degree of personalized service and may have access to complex investments like hedge funds, private equity and real estate.
  • Portfolio managers focus strictly on investment portfolio management rather than comprehensive financial planning. They are typically employed by investment management firms.
  • Robo-advisors are digital platforms that automate portfolio management online using algorithms. Robos have low fees but allow no  human interaction.

When choosing an investment manager, consider your needs - do you just want portfolio management or a full-service financial plan? Also factor in your level of assets. If you have over $1 million in investable assets, a dedicated wealth manager may be suitable. Otherwise, a robo-advisor may better serve your needs at a lower cost.

10 Must-Have Traits of a Good Investment Manager

The best investment managers have certain traits that separate them from the pack.

Here are the 10 must-have qualities to look for:

1. Exceptional Communication Skills

Effective two-way communication is critical between you and your manager 9. They need to clearly explain their investment process and decisions, set appropriate expectations, and address all your questions and concerns.
Managers should initiate contact frequently through calls, video chats, newsletters and reporting. You want to choose a manager who is responsive, articulate, and able to explain complex topics in simple terms.

2. Mastery of Both Science and Art

The best investment managers blend both science and art 9. The "science" is their investment strategy rooted in data, financial theory and evidence-based research. The "art" is knowing when and how to apply that knowledge given the current market environment.

3. Methodical Decision Making

Top performing managers make portfolio decisions based on an established, repeatable process 9. They don't invest in "hunches" or emotions. Their methodical approach may translate into consistent returns over full market cycles.

4. Long-Term Mindset

You want a manager focused on long-term wealth compounding rather than short-term gains 8. They should evaluate every investment decision in the context of your financial plan spanning decades. Their strategic asset allocation should match your need, ability and willingness to take risk over long periods.

5. Independent and Ethical

The best investment managers put client interests first as fiduciaries. They avoid conflicts of interest and do not take kickbacks or commissions. Managers should clearly disclose how they are compensated so you can evaluate independence and conflicts.

6. Exceptional Track Record

Past performance does not guarantee future results, but a long-term track record does demonstrate a manager's real-world ability to generate consistent risk-adjusted returns over full market cycles in different environments 8.

7. Continuous Learner

Great managers are lifelong learners constantly upgrading their knowledge 18. They voraciously read industry research, analyze market data, attend conferences and complete continuing education. You want an expert who stays on the cutting edge.

8. Even Keel Temperament

Emotional discipline is vital for investment managers 9. The best managers stay cool under pressure. They don't panic during volatility and stick to their process. An even keel temperament leads to better decision-making skills.

9. Conviction in their Beliefs

You want a confident manager who has conviction in their investment philosophy and process 9. They should be comfortable taking an unpopular view if supported by their research. However, they also need flexibility to admit when their original thesis is wrong.

10. Passion for Investment Management

The top investment managers have an intense passion for investing and financial markets 18. They absolutely love what they do. For you, that translates to an expert fully engaged in helping grow your wealth.

5 Red Flags to Watch Out For

While the traits above should give you confidence in a prospective manager, you also need to watch out for red flags. Be extremely cautious if a manager exhibits any of these warning signs:

1. Vagueness About Investment Strategy

Managers should clearly explain what investment types they use, their research process to select securities, portfolio construction methodology, sell discipline, risk management and more. Vague responses could signal a lack of established process.

2. Overly Complex Strategies

Some managers try to impress clients with convoluted strategies. But complexity does not equal better returns. The best processes are elegant in their simplicity. If you don't understand how your portfolio is invested, that may be a major  red flag.

3. Lofty Return Promises

Unrealistically high return promises are a hallmark of investment fraud 3. Legitimate managers may target reasonable returns based on historical asset class performance, but guarantees should make you highly skeptical.

4. Opaque Fees

The best managers clearly disclose their fee structure so you know exactly what you pay. Watch for vague, complex or hidden fees. If a manager cannot explain fees to your satisfaction, it signals potentially conflicting interests.

5. Bad Reputation

Do an online search to read third-party reviews on any manager you are considering. Check their regulatory history for any disciplinary actions. Lawsuits, bankruptcies, regulatory censures or shady practices in their past are all bright red warning flags 7.

Questions to Ask Investment Managers

When interviewing investment manager candidates, you need to ask probing questions to assess their skills, experience and whether they are a good fit. Here are 12 key questions to ask:

  1. What is your investment management philosophy?
  2. What is your research process for selecting investments?
  3. How do you construct client portfolios and manage risk?
  4. What are your core competencies as an investment manager?
  5. How do you arrive at return projections?
  6. How will you communicate with me and report on my portfolio?
  7. Do you have an example portfolio I can review so I understand exactly how you will invest my money?
  8. How do you identify yourself: fiduciary, fee-only, fee-based? How are you compensated?
  9. Do you accept any third party compensation or soft dollars?
  10. Can I speak with 3 long-term clients as references?
  11. How long have you been an investment manager and what is your experience?
  12. What credentials and designations do you hold?

Listen carefully to responses and follow up if any answers seem vague. Reputable managers will have no issues clearly addressing these questions.

Why Choose Savvy?

Savvy checks all the boxes when it comes to finding an exceptional investment manager.

They utilize advanced technology to power a goals-based investment process. Their model portfolios are constructed using academic research and financial science using low-cost, diversified ETFs and mutual funds.

Savvy reports performance clearly with monthly statements analyzed down to the household account level. They allow 24/7 access to your portfolio online while also assigning a dedicated financial advisor to each client.

As a fiduciary, Savvy has a legal duty to make investment decisions in your best interest. Their fee structure is simple: a small percentage of assets under management, no commissions or hidden fees.

In short, Savvy leverages expertise and technology to deliver an improved wealth management experience that puts client interests first. That makes them an ideal choice for finding a truly exceptional investment manager you can trust.