2006-07-28 / Columnists

Focus On Financial Affairs

What Is Managed Money (and Why Should You Care)?
By Stephen J. Levine President, Harbor Financial, Inc.


Today, you can seldom turn to the financial pages of your newspaper, check out the headlines on a finance magazine or log onto the internet without stumbling over a reference to "managed money." It's a term that's become very popular, but investors, particularly individual investors, need a clear understanding of what the term actually means, and why it can be important to them.

"Managed money" is money invested for someone else by a person or firm whose business is investing. Professionals who manage money buy and sell securities using investors' money. They are paid by the investors for making those decisions. The idea is that someone else manages your investments-someone with the knowledge and experience required to make good decisions. Such people are called money managers (also, portfolio managers, fund managers, asset managers, etc.-you get my drift).

Clients specifically assign the authority to make buy and sell decisions to their money managers. In the vocabulary of the investment industry, money managers have 'discretion' over how their clients' funds are invested. It is a different relationship than you would have with a traditional broker, who must call clients and receive authorization for every buy and sell they recommend before executing the transaction.

People buy this type of investment service for several reasons. Sometimes they decide they literally can't know enough about investing to make informed decisions. There are mountains of information available every day about the thousands of choices available to investors, but the reality is that you still have to invest the time to find, read and analyze that information. Most people simply don't have, or don't want to spend, that kind of time.

Another reason for using professional money management is that there are some types of managed money investments that allow for customization to the specific investor's financial situation. There are money managers who manage assets specifically to reduce the amount of taxes you pay on investment gains. There are money managers who will screen potential investments according to your social criteria-that is, if you are anti-smoking, they'll eliminate tobacco stocks from your portfolio, or if you like family-friendly work policies, they'll look for companies that have those policies in place. And there are money managers who will take over the management of large blocks of low cost-basis stocks and create a complementary portfolio that helps keep your investments well diversified.

Even people who use the services of a financial planner often elect to-and are often advised to-place their investments with a professional money manager. The financial planner's expertise is in helping you create a plan that is geared to your individual circumstances and goals. He or she uses money managers, directly or indirectly, to help implement that plan. It is a case of two knowledgeable professionals working as a team to optimize your investment experience.

Two common types of managed money investments are mutual funds and individually managed accounts. In both cases, professional money managers accept the responsibility for deciding how and when to invest the portfolio, but there are significant differences.

In a mutual fund, the money managers pool the assets of all the fund investors and buys securities in the name of the fund. As an investor, you own shares of the fund and the fund owns the securities. Mutual funds generally carry very low investment minimums, and you can often buy into a fund for amounts as low as $1,000.00. Funds are available through many distribution points, and costs vary widely, but tend to be constant across all asset levels.

In an individually managed account, the money manager keeps your funds separate from all other clients' funds, and buys securities for you in your name. As an investor, you own the securities directly. These types of managed money accounts are more likely to offer the higher levels of customization mentioned earlier, and require a higher minimum investment, typically $100,000. Costs for individually managed accounts also vary, but often providers offer discounted fees as the value of the portfolio increases beyond established levels, called breakpoints. Individually managed accounts are normally available only through a financial advisory professional such as an independent financial planner.

If you're interested in exploring your investment alternatives in the managed money arena, you should carefully consider the benefits and costs of this financial service. If access to the investment insights of full-time professional investors looks better to you than spending a significant amount of your time studying the markets, and if you've already sworn off the "dart-board" approach to picking your investments, a managed account could be the right fit for you.

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