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When To Fire Your Investment Manager

When it comes to dealing with an investment manager, investors frequently err in one of two ways.  They fire managers they should keep and keep managers they should let go.

This applies equally to a personal investment manager and professional investment manager of pools such as mutual funds.

What’s Behind the Poor Performance of your Investment Manager?

Instead of automatically terminating an investment manager with poor performance (or redeeming your mutual funds), first find out what is behind the disappointing results.

For instance, an investment manager may be getting mediocre returns because his investment style is temporarily out of favour.  Fire him now and you’ll miss the rebound in performance when the style cycle shifts.

Or you might have a “defensive” investment manager sitting on large cash reserves because of a speculative market environment.  His performance may be suffering now, but if you drop him for a more aggressive investment manager, you’re inviting trouble when the market inevitably cools down.

Over a decade even the best performing managers can spend a couple of years in the bottom quartile.  Clients often only evaluate short-term performance results.

Stay Informed in Good Times and Bad

Conversely, sometimes an investment manager should be fired in spite of good performance.  Be prepared to take action whenever you see any of the following:

– A change in investment style
– A big increase or reduction in assets under management
– A new portfolio manager on your account
– A rash of legal or regulatory problems
– A flurry of new product offerings
– The senior partner buying a personal jet or a second vacation home
– The name on the door changes.

Of course, sometimes performance is a valid reason for terminating an investment manager.

If a manager has had two or three years of mediocre returns compared to others following the same style, or has consistently under-performed the market and has had truly terrible results, it may be wise to cut your losses.

There may be times when you decide to fire an investment manager who has done a good job but your investment goals have changed, e.g. a shift in focus from long-term growth towards a focus on maximizing current income.

Generally, it’s not a good idea to change your investment manager too frequently or too quickly.  It takes time to become comfortable with a manager and for them to prove their worth.

You should hire an investment manager only after careful research and thoughtful deliberation.  The decision to fire a manager should be made in exactly the same way.

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5 Comments

  1. Brian Gagnon on May 31, 2011 at 9:03 am

    Hi Boomer,

    I have a slightly different issue with my investment manager and I was wondering what your take would be on it. Currently, I don’t have a very active investment strategy and while I like my investment manager, I feel like the fees are too high.
    Brian

  2. Boomer on May 31, 2011 at 3:47 pm

    Hi Brian. That’s an interesting question and I have some for you? Are you comfortable picking your own stocks or other investments? Can you do your own research and know where to find it? Can you monitor and track your portfolio yourself to determine how you are doing?

    If your investment manager is merely an order taker it would be less expensive to go with a discount broker. But if he actually manages your portfolio, chooses your investments and you’re making money he may be worth the fees you are paying. It all depends on you. For sure, your manager will not appreciate doing the research and giving you advice if you turn around and do your own purchases.

    Some people keep their financial advisor for the majority of their portfolio and open a discount trading account with a smaller amount to try the do-it-yourself approach. Hope this helps. Good luck!

  3. Nyla Obaid on June 1, 2011 at 1:39 pm

    This is really great advice; thank you.
    I think if we really focused on finding a good advisor to begin with, hopefully this issue can be avoided more often. Our clients tell us that these are some of the important considerations before picking an advisor:
    a) Your personal level of expertise
    b) Your desired level of involvement with portfolio
    c) Your desired level of risk
    d) The advisor’s product availability (a wide product offering is often important so that they can support you as your goals change)
    e) Advisor’s fees explained
    f) The advisor’s philosophy about money.

    I think if you do the research and find an advisor who supports you and your goals (even as your goals change), you would not be in a position to have to fire them.

  4. Brad Mol on June 1, 2011 at 1:44 pm

    Hi Boomer, I recently started following Boomer & Echo and am enjoying your blog so far! One additional comment I’d like to make when considering hiring or firing an advisor is to evaluate the overall value you’re getting for your fees. Is it purely portfolio management or is there holistic advice and a written financial plan that is being monitored? Planning provides additional value especially in times of short-term underperformance.

    • Boomer on June 1, 2011 at 3:53 pm

      @Brad Mol: What is paid in fees is certainly an issue that needs to be evaluated. Paying an annual percentage of your portfolio to someone who doesn’t even look at it again after setup is a lot different from paying fees to a manager who gives advice and feedback and makes sound decisions that benefit you.

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