What You Need To Understand About Portfolio Management
An Introduction to Portfolio Management
Choosing a clear-minded financial consultant who understands your requirements is always a tough task. Questions like should you go for an independent consultant/adviser or pick a broker agency always pop up while making decisions to manage portfolios.
It can be quite tricky to choose whether to go popular individuals or established agencies. Some are good with numbers while others are naturally gifted to be visionaries. However, the decision you make will in some way reflect on your approach to portfolio management.
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Learn the Latest Models for Portfolio Management
New studies have basically suggested four models that distinguish itself from the already used old model. With the old model, the approach was to put all your trust on a group of mutual funds of all of the particular client’s investment. The advisers managing each of these funds are being paid for their services accordingly.
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The Old Methods of Managing a Portfolio
However, all the old based approaches have now ‘lost their touch’ so to say and mostly are not even in the best interests of the client. Let’s look at some of the reasons behind the lack of trust in the old methods nowadays.
- For advisers, it’s more of what a client wants to get out of their investments overall rather than the nitty gritties of managing risk of their portfolios along with different benchmarks set.
- Additionally, much sophisticated strategies are being researched upon that produce the same or even better results despite the various instabilities in the stock markets.
So holistically speaking, the new strategies definitely have an edge between an investment company and the client. Having said that there will always be problems and risks that need to be taken into consideration.
New Methods of Managing the Portfolio
So let us have a closer look at the different types of advisers and consultants you will be faced with while dealing with portfolio investments and how you can prepare yourself.
They are the big shots who take up the role of managing money for their clients. Rather than working on a single type of stock or industry, these Portfolio Managers actually focus on choosing investments across a broad range of products.
If you happen to meet one, the first impression you will get is their confidence in how they will manage your money all by themselves. Their ability to customize your portfolio while reducing extra charges like taxes is definitely one of their strong points.
Responsibilities of a Portfolio Manager
One of the biggest challenges for these Portfolio Managers is the sheer amount of work on their hands.
- They are responsible for the overall financial planning
- They are also responsible for advising on simple levels like medical insurance, university funding etc.
- Bringing new clients is of course something that will always be a must and for all the above reasons this approach works best in teams i.e. A single person cannot manage a multitude of clients and vice versa.
Now let us look at a few downsides for the above mentioned scenario. The first one is pretty obvious; Managing an array of clients by someone who is not even qualified to do so.
Recent studies have suggested that most of the broken agencies have advisers working who do not even have the proper certifications (financial planners, chartered financial consultants etc).
Although the connotation seems to portray a negative role but in fact these types of advisers make a very broad range of investments. Such an action results in lowering of costs via traded and index funds.
So basically, an adviser using this approach earns his money from financial planning and allocation of assets. This results in lowering of costs. Such approach therefore is deemed as passive which of course should be properly communicated to the investors as they might be expecting a more active management approach.
Usually clients fail to see the logic of advisers putting their precious investments into seemingly passive modes. That is when clients attempt to purchase index funds from other advisors on their own without the knowledge of their current advisers to try and save up extra costs and fees.
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3rd Party Outsourcers/Advisers
These types of advisers are more about investing into funds which bring in total returns rather than trying to reach already established benchmarks. The approach is to invest in multi-dimensional classes rather than focusing on a single class.
The Cons: One downside is the risk of not having the knowledge of where the investment has been made. Generic statements like ‘global investments’ are always used whenever there’s talk of where the investments are made. Such uncertainty can lead to clients pulling out if not handled properly. This is where the trust factor between a client and his adviser comes in.
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The similarities of home-based advisers to 3rd party outsourcers are immense. However, what these types of advisers do differently is that none of the main investment tasks are given to 3rd party sources. The firm itself has the overall responsibility and has the final say to which investment approach to go for. So to put it in a nutshell, this approach involves a firm managing all operations from its central office, while each of its advisers try to bring in the money.
The Cons: Talking about the negative side, the home-based outsourcers employ the ‘one size fits all’ approach. This can also result in a client looking for other options as well as there are no incentives for them to stick to just one.
Which Approach Works Best for You?
So the question arises. Which of the above mentioned 4 approaches actually works and can be deemed as the perfect one? There is no clear answer to that because every situation will have its own strategy that will work.
Be it the portfolio managers approach or appointing 3rd party advisers, all approaches have their positives as well as negatives. In the end, it’s all up to the clients to decide which type of investment adviser to go for keeping in view the above pros and cons.