Most people have some idea of what financial advice is, but they do not realise that there are a number of aspects to this service. People who work in the sector may be experts in one area or possess wide-ranging expertise across every part of it.
One of those parts is portfolio management. This involves taking the existing portfolio of an individual or organisation and nurturing it to ensure financial targets are met.
In this piece, we will look more closely at what is involved in portfolio management so that you can determine whether it is a service that would be useful to you.
What is portfolio management?
Essentially, portfolio management involves advising clients about potential investments. It starts with the client – which can be either a single person or a business or other organisation – discussing what exactly they wish to achieve with their portfolio manager.
Balancing out the desired end goal is the amount of investment risk that a person or organisation is prepared to withstand to reach that target. Every investment carries some element of risk and often the ones that offer the potential for the largest rewards are also the ones where the risk is greatest.
The plan that is put together by the portfolio manager and client will be based on the targets and risk tolerance of the client.
Once that initial plan has been devised, the portfolio manager will get to work, but there are two different methods that can be deployed:
Active portfolio management
This method sees a portfolio manager make strategic investments in anything from property to shares, with the aim of enhancing the financial position of his or her client. The idea behind active portfolio management is to beat the wider investment market through careful decision making.
Passive portfolio management
If the chosen method is passive portfolio management, the strategy will be to try to equal the returns provided by the investment market through mimicking the index of the chosen market.
Of course, it is entirely possible for a portfolio manager to advise a combination of active and passive methods. One strategy that has proven successful involves investing client money in collective investment funds that are managed actively and ones that are managed passively.
The purpose is to ensure that clients can enjoy the benefits of both. Funds with active management are riskier, but this is where the knowledge of qualified professionals in portfolio management from Chester or elsewhere can be crucial in minimising those risks.
The types of investment
A major part of portfolio management is asset allocation, and the volatility of different assets can vary considerably. The types of assets that a manager invests in will thus be determined by a client’s risk tolerance.
These are some of the common asset classes:
Stock market funds
Stock market funds are notable for providing impressive financial results over longer periods of time, but the up-and-down nature of the stock market makes them a riskier investment in the short term. This is a form of asset allocation that will be suitable for clients with a high tolerance of risk.
This term covers things such as hedge funds and private equity investments. Alternative funds can vary a lot in terms of risk versus reward and this is something that a portfolio manager will have to discuss with the client before investing any money.
Commercial or residential properties
Investing in commercial or residential properties that can be rented out to businesses or individuals is another common asset class. This can be one of the lower risk forms of investment.
Sometimes, a portfolio manager will invest in property company shares instead of the actual properties themselves.
There are investments that can be made with the express aim of improving the client’s portfolio without compromising their views about the environment or society. Two examples of these are money-market and cash funds.
They can carry fewer risks of losing money than other types of asset class.
What should you look for in a portfolio manager?
If you have decided that this is a service that would be helpful to you, the first thing to look for in a portfolio manager is an awareness of the current conditions of the markets as well as the wider economy. A good manager should stay on top of the latest developments through constant study.
It is also best to ascertain what qualifications and certifications a portfolio manager has. This is a complex job, and it is important to make sure that the person or team that you are hiring to look after your investments knows what they are doing. Look for experience and word of mouth recommendations too.
Hopefully this has given you some basic insight into the role of a portfolio manager and helped you to decide if it is something you need.