The Importance of Evaluating Investment Management

Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Whether you're an individual or the financial manager of a company, the ability to evaluate your investment managers is a valuable skill in order to make sure that you are investing as much as possible.

Why Evaluate Investment Management?

The finances of a company are a lot like the weather: some days you have plenty of sunshine, when the orders seem to never stop and the customers are always happy; on other days, however, your company can't seem to make enough to justify its current expenditures. All too often, it is during those downturns that serious expenses can emerge for an organization. Sure, a company may just be able to take on more debt in order to purchase that new factory or replace an aging machine, but often there is a better solution. It could very well be an opportunity to invest in a new market or region. In any event, the ability to have a robust body of investments is invaluable.

Of course, the same could be said for an individual. Sure, most of us won't be buying a factory any time soon. However, the ability to save for the future and invest in new property or higher education is a valuable skill. No matter if you are a business or an individual, that means you'll have to have investment management, or those who look after your investments. In this lesson, we'll see why it is so important to evaluate them.

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  • 1:07 Performance
  • 1:47 Fees for Investment Management
  • 3:35 Why Evaluate?
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By far the most important aspect of an investment manager that you should evaluate is their ability to make sure that your investments perform well. In short, investments should return a profit. However, it's not as simple as getting a profit eventually, but making a profit and guaranteeing that it is available when you need it. Even at 1% interest, a dollar will eventually turn into a million bucks, but most of us won't be around to see it.

It is crucial that performance is weighted against inflation. If inflation is 5% but your return is only 4%, then you are losing 1% every year. A good investment manager will avoid this scenario.

Fees for Investment Management

Of course, there is no such thing as a free lunch. Investment managers do cost money. There are a number of different fee structures that investment managers use to make money from their clients.

Asset-based fees are when the investment manager takes a percentage, normally around 1-2%, of your assets under management every year. For example, if you allow them to manage $100,000, they will take 1-2% of that total every year, so between $1,000 and $2,000. In theory, this should keep them focused on making you money. After all, the more money they help you make, the more money they make in the future. However, in practice, it can mean that investment professionals want you to keep more money under their management so they can get a larger fee every year rather than put it someplace where it would do you more good.

Fee-based fees occur when an investment professional charges an up-front fee every year. Often this starts at around $2,000 a year and can go up higher. The biggest advantage of this system is that you know exactly what you'll be paying in a given year. However, there is also the chance that an investment manager may not focus as much on your investments. After all, he or she has already made a profit off of you.

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