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Investment management is a term that refers to the management of financial portfolios on behalf of individuals, corporations, and private and public entities with a specific objective. These portfolios can be invested in options such as bonds, stocks, property, futures markets and foreign exchange. An investment manager or firm is typically responsible for determining the scope, concentration and mix of investments to be made for the portfolios under their care.

The use of the term ‘investment’ implies that there is an active redirection of the resources within the portfolio towards generating maximum returns or profits. As an industry, investment management has a significant impact on the global financial markets, with investment managers around the world responsible for managing portfolios collectively worth trillions of dollars annually.

From a service provision perspective, investment management has various aspects involved, including asset allocation, portfolio strategy, stock selection, performance monitoring and financial statement analysis. It can also include financial planning and related advisory services so that the investment manager has a say in the investor’s financial life. Kevin Neal, a former independent financial advisor (IFA), is a distribution director at Bluefin Capital, a Luxembourg-based firm that distributes institutional funds worldwide.

In managing a client’s portfolio, investment managers must be diligent in their research, which includes both macro and micro-analysis of the prevailing economic conditions. Statistical analysis of trends is common, as is finding any relevant information that would play a role in achieving asset appreciation.

Main Responsibilities

A firm or individual involved in investment management requires the resources to analyse, make deals, market, conduct research, and prepare reports for clients. Investment firms often hire professionals to perform these tasks, in addition to ensuring compliance with legislative and regulatory requirements, performance of internal audits, establishment of appropriate controls, transaction tracking, and diligent accounting for cash flow.

Depending on the jurisdiction, there are certain assets under management (AUM) thresholds that require investment management firms to register with financial authorities. For example, in the United States, firms with at least $25 million AUM have to be registered investment advisors (RIA) and also register with the Securities and Exchange Commission (SEC). Investment managers also have a fiduciary duty to their clients, meaning they have to prioritise their clients’ best interests at all times.

In terms of compensation, investment managers can take a fee of the value of the portfolio (known as a management fee). The charges are usually captured as a percentage that’s determined on a sliding scale. This means that the higher the value of assets a client has, the higher the potential for negotiating a lower fee. The typical range for annual management fees is between 0.35 percent and 2 percent.

The Investor’s Responsibilities

An individual or company that contracts an investment manager should have a clear investment objective that is communicated to said manager. This can take the form of investment guidelines or policies that are approved by senior management or directors. While individuals may not be as formal, a good investment manager will ensure they undertake a similar exercise to identify their understanding of the kinds of risk they are comfortable accepting for their desired level of reward.

Periodically, investors will need to review the portfolio’s performance to cater for changes in needs or the investment environment. Any change that can potentially impact the investment objective should be examined, with changes made accordingly to the investment policies and the portfolio adjusted as needed to ensure compliance.

Challenges

An investment manager’s understanding of the investment environment, plus their ability to provide professional analysis and diligence, can help them beat market projections and even protect portfolios in hard times. However, as lucrative as the returns might be, an investment manager’s revenues are directly impacted by market behaviour, meaning that unfavourable market valuations can cause a fall in revenue.