What it means
Clients hire money managers because they lack the time, skill or desire to run a portfolio themselves. The manager follows an agreed mandate that sets out the goals, the risk level, the types of assets allowed and any restrictions.
Managers fall into two broad styles. Active managers try to beat a benchmark, such as a market index, by selecting investments they believe will do better, while passive managers aim to match the index at low cost.
Fees are a central part of the relationship. A typical arrangement charges a percentage of assets under management each year, and some managers add a performance fee when returns exceed a set hurdle, which is meant to align their interests with the client's.
Regulation matters. In many countries money managers must be licensed, owe a duty to act in the client's interest, hold client assets with a separate custodian and report regularly, and clients should confirm these protections before handing over money.
Judging a manager takes more than looking at last year's return. Useful questions include how the manager did compared with the benchmark over several years, how much risk was taken to earn that return, what the total fees are and whether the process is clear and repeatable.
Even the best managers cannot control markets, and strong results in one period often fade. A sound relationship therefore rests on clear expectations, transparency and a long-term horizon.
In practice
Real-world examples.
Example
A family office hires a money manager to invest $25,000,000 in global shares. The agreement sets a benchmark, a maximum allocation to any one country and a quarterly reporting schedule. The family office also keeps the right to change managers if results are poor.
Example
A charity's trustees interview three money managers and compare their five-year results, fees and investment processes. They choose the one with the clearest process and the lowest total cost, not the one with the single best year. Their minutes record the reasons so that future trustees understand the decision.
Example
A pension scheme splits its assets between a passive manager that tracks an index and an active manager focused on smaller companies. The mix keeps costs down while leaving room for outperformance. The trustees review both managers against their benchmarks every quarter.
Formula
Calculation
Total fee = (AUM x Management fee rate) + (AUM x Excess return over hurdle x Performance fee rate)
A manager runs $10,000,000 for a client, charging a 1% management fee and a 20% performance fee on returns above an 8% hurdle. The portfolio earns 12%, or $1,200,000. The management fee is $10,000,000 x 0.01 = $100,000. The excess return is 12% - 8% = 4%, which is $10,000,000 x 0.04 = $400,000, so the performance fee is $400,000 x 0.20 = $80,000. Total fees are $100,000 + $80,000 = $180,000, and the client keeps $1,200,000 - $180,000 = $1,020,000, a net return of 10.2%.Case study
Seen in the real world.
Linden Capital is an illustrative, fictional money manager running $200,000,000 for private clients. It adopted a clear investment policy: hold 40 to 50 quality shares, limit any one position to 5%, and avoid short-term trading.
In its first three years the strategy lagged the market by 2 percentage points a year, and several clients threatened to leave. The managers explained that the portfolio was designed to hold up better in downturns and sent a detailed report on risk-adjusted performance.
In the fourth year, in this fictional story, the market fell by 18% while Linden's portfolio fell by 11%. Clients who had stayed concluded that the earlier lag was the price of lower volatility, and most added money. The fictional firm's assets under management rose by a quarter the following year.
Watch out
Common mistakes.
- Choosing a manager on last year's return alone, when short-term results are largely luck.
- Ignoring total fees, which compound over time and reduce what the client keeps, especially when trading costs and fund-level charges are added to the headline fee.
- Failing to check that the manager is regulated and that client assets are held with an independent custodian, which protects the money if the manager runs into trouble.
Questions
People also ask.
What does a money manager do?
They invest client money according to an agreed mandate, monitor risk and report on performance. They are typically paid a fee based on the assets managed.
How are money managers paid?
Mostly through a percentage of assets under management, sometimes with a performance fee. Always ask for a full list of costs in writing.
Is a money manager the same as a financial adviser?
Not exactly, since an adviser gives advice on planning and products, while a money manager makes investment decisions inside a portfolio. Some firms offer both services, so ask which role applies to your account and who is responsible for the results.
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