TAKING STOCK: Picking the perfect money manager

Dear Mr. Berko:

We have an $825,000 IRA to invest, and we want to interview money managers to pick stocks for us. We hope we'll be able to choose the right person. We'd like to know your thoughts on red flags we should watch out for.

CT, Port Charlotte, Fla.

Dear CT:

Selecting a money manager is like choosing a family physician with whom you must be comfortable. Be mindful that good investment judgment comes from experience and that experience comes from lots of bad judgment. Therefore, your money manager should have at least 20 years' experience in managing portfolios. He should also be knowledgeable, wise and trusting.

Avoid the articulate incompetent. This is the money manager who's inordinately persuasive. He's charming, is never at a loss for words, has answers for everything and loves to hear himself talk. He's one of the most dangerous guys in the industry.

Stay away from portfolio managers who use investment strategies that rely on fancy, esoteric methodologies such as bar, point and figure charts and momentum trading, volume reversals, etc. That stuff is mostly trumpery.

Steer clear of investment scholars. This breed has more knowledge than common sense and couldn't figure out how to pour water from the toe of a boot if the instructions were printed on the heel.

Be sure your account is meaningful to the advisor. If your account is small, it'll be just another impersonal nine-digit number on a computer screen.

Remember that a big brokerage is not necessarily beautiful. Unless you have a very special money manager, big brokerages are cumbersome and expensive, and they have all the warmth of an IRS agent and all the soul of a DMV employee. And because investment banking is the prime source of revenue for big brokerages, there are often conflicts between recommendations made to you and recommendations made to their investment banking clients.

Don't be fooled: A big research department does not guarantee good investment advice, either. Rather, it often serves as a poor substitute. There's an enormous amount of jockeying for supremacy within large research departments, and that can create risky investment recommendations.

Ask what mistakes the money manager has made. If the manager does not admit to error, be careful, because he's probably getting close to what I call "perfecting the art of going wrong with confidence."

Do not be impressed with money managers who brag about highly successful past performance records. You may be hiring a manager who is so confidently riding the last trend that he will be the last to admit that the trend is in decline.

Forget all gurus. Gurus abound who believe they can sense fortune and danger. This sensitivity is a skill that most of us believe only someone else can possess. It leads to the guru syndrome. After investors walk, lemming-like, with their gurus toward the nearest cliff, a new guru appears to point the way and is thrust to the forefront. And when he fails, investors will again fanatically search for a new guru to perpetuate the guru syndrome.

Ask the manager how he makes his selling decisions. Probably 99 percent of Wall Street's recommendations are on the "buy" side. There's little competition for selling advice--and selling is the highest art form of investing.

Skip managers who adorn themselves with gold bracelets, neck chains, Rolex watches with jeweled bezels, designer clothes and pinky rings. These guys are so in love with themselves that they have no competition.

Walk away from managers who drop the names of current clients, brag about important people they know or keep numerous personal photographs of themselves on their office walls and furniture. These guys are insecure.

Don't give your business to managers who won't make eye contact, who wear large beards or large mustaches, who brag about the money they make for clients and who sit behind extraordinary, large desks.

... And good luck.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Mon, Oct 17, 2011


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