Understand Your Role In The Investing Process

By Ken Hawkins AAA

In the world of institutional portfolio management, the role and responsibilities of the clients - the pension funds, endowments, foundations, and high net worth individuals – and those managing the assets are very distinct and separate. The client hires discretionary money managers and delegates all investment decision-making to them. In this model of investment management, the client and the money manager work together to ensure the underlying assets are effectively managed.

In the world of individual investors, investors have either a collaborative working relationship with a financial advisor or they do it themselves. Although the above roles are not as well defined, they are nonetheless just as important. In this article we'll explain how long-term investing success will be depends on the effectiveness of the client and the money manager and the role each of them plays in the management of the investment portfolio.

Responsibilities of the Client
The client has the most important role to play; without the client, the other roles become superfluous. As a client, your first responsibility is to set clear financial goals and objectives. It is important that these goals are both realistic and achievable. In the end, you want to be assured that your future assets will match your future financial liabilities.

The objectives also have to be clearly communicated to those providing the investment management or advice. The more complete the information you provide about your financial status, the more effective the investment management can be. This type of information is necessary for the manager to assure that a proper investment plan and process is put in place. This will form the basis of the investment policy which is formalized in an investment policy statement (IPS). The investment policies have to then be approved by the client before the investment plan is implemented.

Another key responsibility is to continue to monitor both your own financial situation as well as the management of your portfolio. If there are changes to objectives, risk tolerance, income, net worth or liquidity needs, these should be reflected in the investment policies.

The final responsibility of the client is to hire or fire money managers if they are not doing a satisfactory job of managing your assets. This decision should not be taken lightly and must be made with the help of careful research and diligence. It is important to remember the client has the most important role, the rest are merely the hired help to ensure the financial objectives are met. (For more, see Dispelling The Myths Surrounding Financial Planners.)

Responsibilities of the Money Manager
The money manager works to ensure that the long-term goals of the client are met. Armed with a full understanding of the client's financial situation and future needs and liabilities, he or she will draft up an investment plan that will provide the framework for managing the client's assets. Developing a long-term or strategic asset mix for the client allows the policy maker to effectively link the client's long-term goals with the capital markets. (For related reading, see Asset Allocation Strategies and Achieving Optimal Asset Allocation.)

The rules, responsibilities and constraints that govern the management of the investments are described in the investment policy statement. The manager also ensures that the investment process is followed, and that any changes in the financial circumstance or objectives of the client are reflected in a change of policy.


The money manager is the role most people associate with investing because he or she makes the day-to-day investment decisions.

The money manager will have an investment strategy that provides the discipline necessary to ensure his or her investment decisions are sound and will operate within the guidelines laid out in the investment policy statement. Following an investment strategy and always mindful of risk, the money manager's primary goal is to outperform the appropriate performance benchmark.

This role involves continuously monitoring the economy, capital markets and the client's investment portfolios. In addition, the money manager is continually researching and analyzing investment opportunities. (For more insight, read .)

The Client Is the Most Important Role
Do-it-yourself investors should look at the management of their assets from a client's perspective. In this case, "client" refers to the investor's spouse and family as well, who are relying on the proper management of those assets. Are the right policies and strategies in place? Is the investment portfolio consistently doing well? Should the investor fire himself and hire someone else? It is important for do-it-yourself investors to do a critical evaluation of their own performance.

In a collaborative relationship with an advisor or salesman, the boundaries between the roles become blurred. Many investors will share the role of money manager with their advisors. Clients should make sure that the roles and responsibilities of both parties are clearly defined, that investment policies are put in place and that goals are met. Oftentimes, the power shifts away from the client and into the hands of the advisor or salesman; however, because the client is the most important person in this relationship, it is imperative that investors keep their hands in mix.

Inevitably, the responsibility of the management of an investment portfolio and its success or failure lies with the client because it is the investor who has most to gain or lose. Therefore, taking the role of client seriously is necessary to ensure investing success. (To learn more, read Full-Service Brokerage Or DIY?)

Conclusion
In the world of the individual investor, be it the do-it-yourselfer or the investor who works with a financial advisor or salesman, most of the time and effort is spent on playing the role of the money manager. The client's role is often neglected, but it is just as important in ensuring that the investing goals are met. It is up to the individual to make sure that someone is taking responsibilities for those roles. When the policies are well defined and the roles understood, there is an increased likelihood that better investment decisions will be made and long-term investing success achieved.

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