What is the Role of a Portfolio Manager?

Fundamentals ·

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There is nothing wrong with managing your financial portfolio on your own (non-discretionary portfolio), although, in some cases, it may be preferable to find a qualified professional and let him manage your money. Those professionals are called portfolio managers. A portfolio manager is someone who fully controls a portfolio and makes all of the necessary investment decisions on behalf of the portfolio's owner.

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There are other jobs with similar functions such as financial advisers or wealth managers, but a portfolio manager is usually more focused on analytics and strategy, rather than on any direct sales.

What a Portfolio Manager Does Exactly?

Portfolio managers, unlike financial advisors, are free from the burden of pushing certain (especially new) financial services to their clients. Instead, they can concentrate on managing assets that are already owned by their clients. It's safe to say that portfolio managers deserve more trust because they don't have an incentive to sell any kind of suspicious financial products to their customers and to get money from their transaction fees.

The main difference between a portfolio manager and a financial adviser is that portfolio managers tend to go deeper into client's current situation so they are more informed and their expertise is usually better, although they usually cost more because they spend more time on each client.

A good portfolio manager should be able to analyze your current portfolio (assuming that you already have one) and to propose certain beneficial changes according to his knowledge of a market and your unique position, risk tolerance and goals.

If a portfolio manager works for a big company (which happens, but it's rare), he usually has to follow certain rules and guidelines that reflect the company's policies and clients’ preferences. For instance, if a client wishes to pursue a conservative investment strategy, a manager will try to allocate clients’ funds accordingly by using certain tools and patterns that are used in this company in order to manage similar portfolios.

A portfolio manager has to determine who is he working with and it can be done by examining return expectations, investment horizon and risk tolerance of his client. When you sign an agreement with a portfolio manager, there would be questions like:

  • What's your monthly income?
  • How much money are you ready to lose in the time period of N?
  • What is your risk tolerance level?
  • How would you describe your investment strategy (aggressive, passive, etc.)?
  • What return do you expect from your portfolio?

Based on your answers, a good portfolio manager should develop a strategy and pick certain investment instruments that supposed to pursue your goals and match your expectations in the most effective manner.

As a portfolio manager, you have to do deep in analytics, contact clients and other departments within the firm (and even colleges in other firms) and make sure that you follow all of the government regulations, privacy laws and anti-money laundering / anti-fraud policies. During the management process, which can take 6, 12 months or even years or decades, a manager often comes back to a portfolio and check on its performance. If it's a big and important portfolio, those reviews might happen on a daily basis. In case when something goes wrong, let's imagine that the price of some assets unexpectedly falls below a risky level, a portfolio manager has to react and make appropriate changes. Those assets might be sold or replaced with other assets from a similar asset group. Portfolio managers use various market indicators like P/E ratio in order to analyze different assets and make informed decisions.

People trust their money to portfolio managers because they expect that those people are qualified and they are tracking the market 24/7. Portfolio managers supposed to have a deep understanding of the market which usually comes from many years of dealing with the market events and managing portfolios. A good portfolio manager can save his clients’ money during a market crash and he is also supposed to earn more than an unqualified person when the market conditions are good.

Broker, Financial Adviser and Portfolio Manager

Those jobs might have many similarities and we already mentioned the differences between financial advisers and portfolio managers, but let’s take a look at brokers and on what they do. A broker is supposed to follow the orders of its clients, brokers rarely propose any changes or intervene in their clients’ investment strategies and some brokers are not even people, they are automatic systems which simply execute orders.

It's often not possible to access the market directly for an individual investor, that is why almost anyone (including many portfolio managers) is using a broker to get access to the market through it.

Is it a Good Job?

Portfolio management is a quite a decent job with annual salaries starting from $60,000 worldwide (and the average salary in the USA is about $85,000, according to the payscale.com), but this isn't an easy job to land: those people are responsible for a lot of money and their mistakes are very costly (literally) so you have to be extremely knowledgeable, trustworthy and experienced in order to get hired.

Only the wealthy private investors and some big funds can afford to have professional portfolio managers on full-time payroll. Of course, there are some entry-level positions related to this role and there are some related jobs with a lower salary but true portfolio managers are very valuable and expensive.

How to Become a Portfolio Manager?

It's common to start this career by working as a financial analyst in an investment firm. If you perform your duties effectively there and can prove that you understand the market, you may be promoted to a portfolio manager, if such a position exists within the company.

An interesting thing about this job is that it's scalable, which means that there are no better and higher positions than a portfolio manager. Your career just grows with the amount of money you are trusted with. If a portfolio manager can successfully control $100,000 fund and does it well for a 3 – 5 years, he might be trusted with a bigger sum and make more money as a result.

Of course, you don't need to be hired in order to grow as a portfolio manager, you can gain the same experience by managing your own money if you have it and if you're ready to take risks.

We've seen tremendous progress in financial software in the recent years which allowed almost anyone to try himself in the role of a portfolio manager. You don't need to have a lot of money in order to create and manage your portfolio, although it would help. This doesn’t mean that professional portfolio managers are not needed anymore or that they are less valuable, it just means that this profession has become more open and democratized.

The main asset of a good portfolio manager is not his money but his experience. This job usually requires a financial or business degree, some experience in the field and a bunch of certificates. You don't need all of that if you want to manage your own money, but it gets really strict and regulated when it comes to managing other people's assets.

capital  ·  investing  ·  finance  ·  portfolio  ·  personal finance  ·  management  ·  analytics

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