My hunting trip for a money manager
Posted by Frugal on April 22nd, 2006
A couple of years ago, with my idle cash piling up, and my time dwindling down for a newborn in my family, I decided that I wanted to give up the control of some of my money to someone else, and see how well it would turn out. Since I did and still do most of my investment decisions on my own, I wanted to find someone or some firm that was hopefully at least as good as I was (or else, what is the point of getting an advisor).
The first one I spoke to was from Bank of America. She asked me about my current investment, and had me filled out a profile survey on my risk tolerance and investment goals. Sensing that I was quite competent in doing my own investing, which at that time included selling covered call options and short-sellings, she actually didn’t call me back for further in-depth appointments. Sounds a little rude, but I was glad that she didn’t waste her or my time.
The second one I spoke to was from UBS Financial. This advisor was relatively new in this business, probably less than 3 years, and was more willing to win my business. Again, she asked my current investment, and walked me through some standard talks on those large cap/small cap, US/foreign, stock/bond, income/growth portfolio diversification. And then, later she came back with some selection of funds and allocation for what she would recommend for me. She worked hard, but I was not impressed. I could have done exactly the same thing utilizing ETFs or mutual funds to achieve the same purpose, but without the 1% fee (which is usually the minimum money management fee in this industry).
The third one I spoke to was from Smith Barney. This advisor was knowledgeable, and was trying to sell various kinds of financial services such as 529 college saving account, and even mortgage financing. Again, I went through this standard talk about age to stock/bond allocation, and diversification among large cap/small cap, income/growth, US/foreign sectors. He even touted on one of his energy investment recommendation which had a return exceeding 50%. However, I gave him an ETF holding of mine which practically tracked his recommendation in chart exactly, and yet I got in even earlier than his recommendation call.
By this time, I was totally unimpressed with the standard asset allocation and diversification talk. So when I met the fourth advisor from Ameriprise (formerly American Express), I decided to quiz this poor guy, before I wasted more of his and my time. I devised a set of four simple binary choice questions, such that randomly guessing would only have 1/16 chance of getting all of them right:
- Shall I invest in a foreign utility or domestic utility company, if $US is going down, and all other factors remain the same?
- Shall I invest in a domestic producer or foreign producer of a certain commodity, if $US is going down, and all other factors remain the same?
- Shall I buy or sell more of the commodity producer stock, if interest rate is going up, and all other factors remain the same?
- Shall I buy domestic stocks or foreign stocks, if $US interest rate is going up?
Despite my persistence on having him answer my quiz before the appointment, this guy from Ameriprise refused to answer my short quiz. Instead, he told me that he couldn’t give out any investment advices when I was not his client, even though I protested that the quiz was only testing his general knowledge on economics. I guessed he knew that he couldn’t answer all of my questions correctly, and chose to refuse my trial instead of embarassing himself.
Want to try answer my questionaire yourself by posting to the comment? I will post the answer in the comment after a week. After these meetings with financial advisors from investment banks and brokerage houses, I have concluded that unless it’s an actively investing firm like a hedge fund, you are probably better off using ETF and low fee mutual funds to construct your own customized portfolio with regular rebalancing. Of course, whether active investing is better than indexing is highly debatable. But if I’m paying for 1% (or more) management fee, I would want my money manager to actively work for above average performance, rather than plain indexing for an average performance (minus his fees).
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April 24th, 2006 at 6:14 pm
Ok Ill take a stab, maybe it will show how little I know about investing…..
1)I would take the foreign utility because the dollar is falling so if nothing else I might gain on the currency.,
2) To me this depends more on the commodity demand, but if everything is equal I would go with the domestic producer because the dollar is falling and therefore more opportunity for exports.,
3)I would sell producer stock if interest rates are going up, that means the government is trying to slow the economy and that should have global effects on demand.,
4) This is toughest, if US interest rates are going up I have to go with foreign stocks, I think US interest rates tend to have an effect on the global economy, but larger foreign caps I would think whether the storm better.
How bad did I do?
April 24th, 2006 at 8:37 pm
Hi, 2million,
I guess I don’t need to wait a week to post the correct answers, because you have already posted everything correctly, and with all the right reasoning. See, it wasn’t that hard, just some healthy brain exercise. And you’re well over-qualified for being a financial advisor. I think these questions are just initially intimidating, only because they are not straight from the textbook, and you cannot google out the answers. By the way, you are so right about your comment on the fourth question which was the “toughest”. I think it is possible to answer it opposite but with different argument. It is only the most vague question, but my own reasoning is similar to yours. Overall, I’m extremely impressed with your intelligent answers.
I actually learned some of these answers in a very hard way: through losing big money in the stock market. Sometimes you just don’t think enough, until you start to lose money and make mistakes.
April 24th, 2006 at 9:33 pm
[...] Frugal of My 1st Million at 33 presents, “My Hunting Trip for a Money Manager” where he chronicles his search for a money manager. I hate to offer my opinion on this carnival, but this is a really fantastic overview of the “hunting” process. [...]
April 25th, 2006 at 11:31 am
Really I got these right? Haha wow – I am in the wrong career path. I figured I was only getting 1 or 2 right…I always enjoy a good brain exerciser.
Looking at my investment returns I dont think these questions will weed out poor money managers
.
Enjoy the blog! Keep it up.
September 23rd, 2008 at 5:13 am
Frugal,
I agree with the rationale for answers 1,2, and 3. Those are the answers I chose. However, all things being equal, rising domestic interest rates lead to a stronger domestic currency, so that the exchange rate difference could offset the anticipated capital gain. So, if I really believed that foreign stocks were going to go up more than domestic stocks, and my only observation was that domestic interest rates were increasing, I would hedge that foreign investment with a foreign currency put. That way, most of my capital gains would be pure caital gains, not affected by currency fluctuations.
September 23rd, 2008 at 5:13 am
Frugal,
I agree with the rationale for answers 1,2, and 3. Those are the answers I chose. However, all things being equal, rising domestic interest rates lead to a stronger domestic currency, so that the exchange rate difference could offset the anticipated capital gain. So, if I really believed that foreign stocks were going to go up more than domestic stocks, and my only observation was that domestic interest rates were increasing, I would hedge that foreign investment with a foreign currency put. That way, most of my capital gains would be pure caital gains, not affected by currency fluctuations.
July 23rd, 2009 at 9:12 pm
If I am interested in having someone manage funds for me to help me build my business how much would I need to start an account and how fast can I expect a return on investment?
Do people lend others money to get started? If so how does one go about getting a loan or advertising to get enough funds to invest?