Opinion On Private Money Managers vs. Mutual Funds.

Open-end funds issue new shares as new money comes in, and do not trade on exchanges. You can only buy and sell (redeem) shares of open-end funds through the fund company, and they are only priced at the end of each trading day. The term mutual fund generally refers to open-end funds, and is the subject of this page.

A money manager is someone (or a firm) that generally doesn't manage individual investor's total portfolios, but manages money according to an "investment style."

For example, an investment manager may have good luck picking Large-Cap Value stocks for his clients' portfolios. Over time they may decide to stop managing the whole picture for clients, and change their business to just managing the Large-Cap Value asset class. They would then "hang their shingle" as a Large-Cap Value stock manager.

If someone calls themselves a money manager, and they manage the whole portfolio for clients, then they are just using the wrong name. The correct names are investment advisor, investment adviser, investment manager, portfolio manager, or financial planner.

To a money manager, becoming a real full-fledged mutual fund is almost always the goal. This is because:

º You get to be public, which means many more people can give you money to invest. The more money one invests, the more money they make, and generally speaking, the economies of scale make it more efficient (the cost of buying 100 shares of a stock is a far greater percentage of the total cost of the trade than it would be for buying the 10,000 shares of same stock). Doing just a little more work for a lot more money is something most everyone wants.

º You get free publicity! Your fund gets to be listed in the Wall Street Journal (if it has over $25M in assets), and once it passes certain criteria, it also may be listed on database software like Morningstar. If they have good returns (relative to the asset class), many people will find the fund using their filtering tools, and lots and lots of money will roll in - for free. If they're really good, they'll get to be on TV and in magazines, again, for free.

Contrary to most of their marketing material, there is nothing special about private money managers. Private money managers are just people who manage money, and for whatever reason, don't want to become a mutual fund.

It only costs around $5,000 to file the paperwork to become a mutual fund. So common reasons why are:

º They don't want to have their operation in public view.

º They as people don't want to be in public view (maybe their hiding from someone?).

º They don't have enough assets needed to become a mutual fund.

º They can't pass the regulatory requirements to become a fund, for whatever reason.

º They are not interested in growing. It's a lot more work, and more expensive, to become a mutual fund. You have to hire compliance people, auditors, and more clerical staff. Money managers typically don't like to manage people, so office managers also need to be hired.

º If their returns (relative to the asset class) are not good, then being in the public eye would be a bad thing.

º They might not think they can drum up the $25M in assets needed to be truly public. Why go through all of that work becoming a fund if you won't get the benefits from it?

The Bottom Lines

º An advantage of hiring private money managers is that they tend to keep your personal information more private. Mutual funds tend to play games with your personal information (like selling lead lists with your name, address, and phone number) to make more money. They're also big on spamming you with unwanted junk postal and e-mail.

º Another advantage of hiring private money managers is that they may have time to meet with you personally. You'll almost never get to talk to the manager of a mutual fund.

º Some private money managers can work with you on an individual basis to manage your money more "tax-efficiently." Mutual fund managers do what's best for the fund's total return numbers and ignore shareholders' individual tax situations.

º Being public and transparent in the investment business is much better. The more public a firm is, the less likely they are to go under, leave town with your money, and hide details of the people and the firm that investors would like to know. Your money is safer with mutual funds because of the intense regulatory control.

º If a money manager is not interested in growing, then they may be more interested in retiring, selling the business, or any number of things that investor's probably wouldn't like long-term.

º There is much more continuity with mutual funds. If the manager quits, dies, retires, gets into trouble and gets their license revoked, the fund will just hire a new one and keep going.

The whole operation of a private money manager could end if something happens to the manager. There's no telling what could happen to your money if left unattended. None of which would be good.

Some Things To Keep In Mind When Dealing With Money Managers

º First, if you run across a private money manager, just ask them why they don't become a real mutual fund. Look for Real World advantages to your life over mutual funds and ignore the marketing pitch.

º Make sure they are a Registered Investment Advisor (RIA) and they give you their SEC Form ADV disclosure brochure (or get a prospectus from the fund).

Read it and make sure there's nothing that you're concerned with. If they don't give you their form ADV, ask them why. If you're skeptical of the answer, call the SEC or the State's Finance department and ask about them. You could be a hero by uncovering a huge scam just poised to take millions from investors.

º Get an annual report to see how they're doing financially. Private money managers do go under.

º They should have at least five-years of total return performance. Any less and their great returns could just be short-term luck that will reverse as soon as you give them money to manage.

º Being CFA Institute PPS compliant is a good thing, but not necessary. If they are compliant, then that shows they are more serious about their business and their return numbers have been audited.

º Evaluate how they stacked up against their proper benchmark index. If they say they're a Large-Cap Value manager, and they compare themselves to the Wilshire 1000 Growth Index, then you have a problem. If they appear to be using the wrong benchmark index, then they probably are. Investigate, and if they are, then avoid them. This is a common abuse that is used to mask poor investment performance.

º The manager should provide information on the stability of their team. How many people were just recently hired, fired, quit, retired, etc? Do they have enough people and resources to stay compliant with the regulators, and do a good job of managing money? Do they plan to grow or shrink over time? You want the manager to be obsessed with babysitting stocks, not with personnel, operations, legal, cash flow, regulatory, or other problems.

º The money manager should have a clear focus on very few asset classes. Trying to work with more than a couple asset classes will dilute their attention and may result in mediocre performance. What are their strategies and philosophies? How long have they been managers of those asset classes? Do they change asset classes when economic conditions change - do they switch to growth managers when the economy is growing, and then value during recessions? Anything that doesn't show that they've stayed the course in the same very few asset classes, over both booms and busts foretells bad news to come. There's less problems when there's only one clearly defined asset class, like Small-Cap Growth, then nebulous objectives like global, balanced, asset allocation, world, or hybrid.

º The manager should affirm that they have not been subject to, nor has pending, regulatory fines, censures, litigation, investigations, etc.

Private Money Managers are nothing but people for whatever reason are just too lame to become a real mutual fund. For example, they can't pass or can't afford the licensing requirements, don't want to grow, don't want to hire someone to manage the paperwork, or don't want to have their dismal performance audited and published, etc. Everyone should want to be a mutual fund because you get to be listed in places like Morningstar, you get way more money to manage, free advertising, free performance comparison with the market and peers, etc. It's not that difficult to become a fund, so instead of being impressed that they're "private" you should run for the hills because you'll never know the real reason why they don't want to be "public" like everyone else. You only want to give money to managers who are out in public every day competing head to head with everyone else - not those that want to hide.

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