The golden rule to gain a somewhat stable and reliable tomorrow is to invest. It is like fending for certainty in an uncertain world. Eventually, you will get returns on your investments. So, where and how do you start investing?
Everyone does not have the time, interest or expertise in studying the market and its fundamentals. There are one too many of them. So, how do you begin? Several experts can help you get started with investing. For simplicity, let us refer to them as investment advisors, shall we?
Investment managers: what are they, and what do they do?
An investment manager is an individual or a firm that makes investment decisions about portfolios of stocks and securities on behalf of the clients. However, these securities are not selected at random. Investors also have to provide the raw materials for these managers to deliver the finished product – a final set of best-possible investable securities. At the outset, the raw materials are aspects, including investment objectives, income, family background and risk tolerance levels. Once defined, investment managers then scour for instruments and securities deemed most appropriate for the client in question.
So, what activities do investment managers perform? Several activities are involved in investment from daily buying and selling of securities, portfolio monitoring and management, transaction settlement, performance evaluation, legal and reporting. An investment manager can either handle all of these activities or focus on a few of them. Much depends on the scope and size of their practice and the company.
Key tasks of investment management
Whatever be the scope and size of the investment management firm, the primary tasks and functions remain the same. These are below.
1. Assessment of client goals and attitude to risk
It all starts with understanding your clients’ requirements. For this, investment management firms need information such as the investable amount, desired return, timeframe for investment, and risk appetite.
2. Monitoring the investments
There are several investment avenues out there, such as government bonds, shares and mutual funds. The function of the investment management company is to be aware of all possibilities and compute investment risks and returns of all the potential vehicles. This is the job of an investment analyst.
3. Curating investment strategies
Clients need a portfolio of investments that match up to their objectives. An ideal portfolio is diverse, comprising different asset classes. Doing so helps to reduce risks. It aligns with the case of not putting all the eggs in a single basket.
Into their skin: getting an understanding of investment managers
So, what is it about investment managers and companies? Managers can vary in size. They can either be a one- or two-person office to diverse and large multidisciplinary firms with branches across the globe. Whatever be the size and form, the end goal is the same. Investment managers charge their clients a fee. The fee is normally a clear percentage of the client’s assets under management (or AUM). AUM, simply put, is the value of the portfolio.
Let us say that an individual has an investable corpus of USD 5 million. And the manager, in question, charges 1.5 per cent annually. The client is then liable to pay a fee of USD 75000 per year. According to research data by Willis Towers Watson, in 2020, the four largest investment management companies were BlackRock Inc, the Vanguard Group, State Street Global Advisors and Fidelity Investments. Now, these rankings are based on the AUM.
Are all investment managers the same?
Well, Investment Manager is a generic term. There is a ton that happens behind the sections of an investment management company.
Financial planners are responsible for developing a holistic plan for investors based on factors (or raw materials, as mentioned above). Investors are required to fill an IPS or Investment Policy Statement. This document lays out the general rules for the manager. Also, the statement offers general investment goals and objectives of the client. Also laid out are the strategies that the investment manager should deploy to meet these objectives. Second are the financial advisors. These, essentially, are stockbrokers. They charge a commission, known as a brokerage, for buying and selling securities on behalf of clients. Then there are portfolio managers who directly invest the capital to achieve positive investment returns.
What are the roles in the investment management industry?
Aspirants who are currently undertaking their education in finance and investments would want to become investment managers someday. However, the investment management industry today is extensive. Fresh graduates, especially, have a lot of options and avenues to kick start their financial careers. The typical roles (or titles) are analysts, investment managers, risk managers, traders and sales.
Different types of investment firms
- Large investment management firms have assets under management (or AUMs) that run into trillions of dollars. Blackrock is one of the largest firms out there.
- Boutique firms are small-scaled firms and operate their services on the parameters of quality people and personal touch.
- Some specialists provide investment expertise in a particular area, such as private equity or art investment.
- Diverse investment banks also tend to have a well-developed asset management division. Chief among them is Goldman Sachs.
Parting Words
Now you know what investment managers do and the different types of services and firms out there. When selecting an investment manager or firm, do your due diligence. There is no one-size-fits-all. For instance, a person who is in his early 20s may not need a portfolio manager. A financial planner would be more relevant. Also, perform background checks of the investment managers’ professional regulatory qualifications. Doing so ensures that the manager has the requisite skills and experience. Lastly, always make sure you review the fee structure very carefully.
