Copyright

The Importance of Evaluating Investment Management

The Importance of Evaluating Investment Management
Coming up next: Audit Committee: Role & Responsibilities

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:01 Why Evaluate…
  • 1:07 Performance
  • 1:47 Fees for Investment Management
  • 3:35 Why Evaluate?
  • 4:12 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed
Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

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.

Performance

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.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support