You’ve inherited some money, or sold a business. What now?
Most people don’t have the skill, time, or willingness to manage their own investments.
One option is to entrust your funds to a professional money manager. But how to choose one?
I would recommend the following checklist:
1. Skin in the game
The first question I would ask: “What percentage of your net worth have you invested in the way you are recommending?” If it’s not a significant portion, I would quit the meeting right here and walk out.
Some years ago, I helped a friend get his finances in order. He owned some products that the private banker had recommended. “A great opportunity”, the banker said. I asked him: “Do you own any of these funds and certificates?” He smiled and said: “No, I’m saving to buy a rental property.” A prime example of “Don’t listen to what people say. Watch what they do.“
2. Aligned incentives
Make sure that the incentives between the manager and yourself are aligned. How does the manager get paid? Does he charge a high management fee? Does he get paid when the performance is negative?
Personally, I prefer and recommend the old Warren Buffett Partnership model: 0% management fee, an annual hurdle, and then a 25% performance fee. A high water mark ensures that a negative performance needs to be made up before the manager is paid. Simply said: the manager should only make money when you make money. Here’s a clip of Charlie Munger commenting on this topic.
3. Aligned investing philosophy
How does the manager choose investments? Which criteria are applied? What is the minimum time horizon? The approach needs to make sense to you, and you need to understand the basic concept. The manager should also be able to show a track record of the applied approach. Ideally his own, or at least of the people/organizations that inspired him to use this approach.
Applying this checklist does not guarantee investment success. But it might help you prevent painful mistakes, and stacking the odds in your favor for finding a good manager.