Tips for Working with a Money Manager

12/21/2012 7:00 am EST

Focus: MONEY MANAGEMENT

It's even more important now than ever to know how to find a good manager and what to ask potential money managers about how their skills match your goals, says Tracy Ann Miller of Portfolio LLC.

Gregg Early: I am here with Tracy Ann Miller, Chief Portfolio Officer for Portfolio LLC. Tracy, I had a question about working with clients. Do you ever see any big challenges when people come to you for money management advice? What’s the most difficult thing you see out there with individual investors working with money managers?

Tracy Ann Miller: I believe that people have misconceptions and have bought into myths about what advisors and money managers do, and it makes it more difficult to help them reach a successful outcome with what they’re trying to achieve.

Many times, they believe that it’s all about the return—this money manager has X returns, this money manager has Y returns. Or they start thinking it’s all about the fee—this manager charges this percent and that manager charges that percent.

They fail to realize that a good manager, a good advisor, is really all about knowing who they are and what they need and guiding them between all the choices out there to help them preserve what they have and then present the right strategy for getting there. If it costs a little more to do a certain strategy and that’s the right thing for them, that’s what is going to help them be successful and get where they really need to go. If it costs less, you know...

Gregg Early: It’s more of that penny wise, pound foolish kind of thing with some individual investors, where they’re so concentrated on the price of what it’s going to cost to help them, that they’d prefer to lose the money in the market than invest in the strategy that might make them more.

Tracy Ann Miller: Right. A great example of this is people who hold concentrated positions. We get extremely emotional about our own money and it’s very difficult for us to make good decisions about our money sometimes.

Everyone has the right to do what they want to do with their own money—after all, it’s their money—but there are advisors and people that can help clients know what their choices are and understand what their risks are that they’re taking.

I’ve always told my clients it’s OK to take certain risks if you go into it with your eyes open. If all of your wealth is tied up in one stock, and I can show you where the risks are in doing that, and you say OK, I’m going to take that risk, that’s one thing. But if you just don’t understand what that risk is and you go and take it and you’re squandering your wealth for your family and for your heirs, I think that’s just not good stewardship.

It’s just difficult sometimes to get clients to understand that good advisors, and if they're not with him while he’s doing this, he’s talking to them about what’s in their own best interest and showing them a lot of different alternatives, not just what that particular advisor may be offering. If they’re not going out and trying to find somebody like that, they’re doing themselves a disservice as well.

Gregg Early: Well, and there’s a difficult challenge in communicating that to a client as well, right? I mean, I’ve heard from money managers previously that they’ve had clients who’ve decided that they only want to invest in two or three stocks, and everything else be damned to a certain extent. And then you run the risk of telling them that what they’re doing is dangerous, yet at the same time they just pack up and leave. It is difficult balancing act.

Tracy Ann Miller: It’s extremely difficult. Clients are their own worst enemy.

I have a real passion for helping people have an actual result, not just play. I worked at a place one time where clients just streamed in and just opened accounts and wanted to buy X, Y, or Z.

I would be the type of person that would say, "Why do you want to buy that? Obviously, this is hard-earned money you have here. You’re telling me you took all your money out of your savings to walk in here and buy this stock, why do you want to do that?"

Most of the time the answer was laughable: my neighbor did it, my son told me I should do it, I heard about it on the TV. What is your expectation? They don’t really know what to expect.

I’d say, "How hard is it for you to save this $10,000? How long did it take you to save this?" He's been working on it the last ten years. OK, so you’d be willing to take this money and put it in something that could go away tomorrow, after you took ten years to get it? Because they’re not thinking about those things.

I say, shame on our industry for being so difficult, because we’re not even training some of these advisors to go out and ask those questions. It’s about; again, from the advisor’s point of view and the firms that hire advisors...it's all about making money.

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Gregg Early: Then from the individual investor’s point of view, too, to get the most value from their money manager, what approach do you think they should take?

Tracy Ann Miller: From the client’s point of view?

Gregg Early: Yes.

Tracy Ann Miller: They should ask questions. They should be willing to.

That’s a challenge, I’ve got to admit, because every client is so different that it’s difficult for them to know who to go to. They will ask a question of a money manager who works through an insurance company or a money manager who works through a fee-based firm, or a money manager who works through a wirehouse. And when we call somebody a money manager, clients don’t always necessarily have a distinction between that and an insurance salesman.

So, that’s a difficult question to answer. I just think clients should ask more questions and try anyway to find someone, when they give them advice, it resonates that they’re giving them a lot more choices and educating them, instead of going with something.

Gregg Early: So, instead of giving them a list of stocks, actually continuing the dialogue and having it be more of a learning process, at least initially, than simply, "Oh, you want growth? OK, I’ll put you in growth stocks."

Tracy Ann Miller: Right.

Gregg Early: But, what kind of growth. Do you want total return?

Tracy Ann Miller: That’s the thing, though, Gregg, why would we ask a client do they want total return or do they want growth and income? Does that mean anything to them? No.

But if you’re a good advisor or money manager and you sit down and question a client, you get to understand them, then your job really is to make those choices for them and help them understand that this is what they need. I don’t think clients really understand all of our jargon. They don’t understand the difference between growth and growth and income. They do know how much risk they want to take.

I think if we’re managing stocks, I’m not going to concern a client with whether I’m deciding between Coke (KO) or Pepsi (PEP). I’m really not thinking Exxon (XOM) or Chevron (CVX). I’m the one they’re hiring and coming to, to make those choices. So what I need to explain to them is that this is the amount of risk that’s appropriate for you, this is the time frame you need to think about, and here’s what we should expect out of this.

We’re not magicians. This is tough. You can’t spend more than you make. You have to save money. You have to think about the future, and you have to have a long enough time frame. You need to look at, what this money is for and make sure you’re not investing money that you need to pay the rent with next week or those types of things.

So it’s a big issue and obviously it’s not going to be resolved overnight, but I think we have the unique chance in our industry right now, because of how it’s evolving, to make some of those changes and make it easier for clients to know where to go.

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