Understanding Investment Management: The Basics

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Understanding Investment Management: The Basics

What Is Investment Management?

It is important to note that the term “investment management” encompasses more than just the purchasing and selling of financial assets. Management entails coming up with a plan for buying and selling assets, either in the short term or the long term. Banking, financial planning, and the performance of tax-related tasks may also fall under this category.

Most often, it is used to describe the process of overseeing and rebalancing a portfolio’s assets in order to meet a predetermined financial goal. Money management, portfolio management, and wealth management are all terms that refer to the same concept of overseeing an individual’s investments.

The Basics of Investment Management

Investment professionals work to help their customers achieve their financial objectives via the management of their financial resources. These customers might be either private individuals or larger organizations like governments, universities, and insurance firms.

Most investment management businesses need you to open an account with them or with a brokerage company they utilize. They will assist you in moving funds from your current accounts at other organizations, such as individual retirement accounts (IRAs), taxable brokerage accounts, or retirement plan assets remaining in a previous employer’s plan. Asset allocation, financial statement analysis, stock selection, portfolio monitoring, and strategy and execution are all parts of the investment management service.

First and foremost, your time horizon and financial objectives (retirement, college, a significant purchase) should inform your investment choices. The investment manager will also ask you questions designed to gauge your risk tolerance, or how well you can handle volatility in your investment returns and the stock market in general. The investment approach is shaped by the manager’s assessment of the market, past performance, tax efficiency, and fees.

What Does An Investment Manager Do?

A client’s investment portfolio is managed by an investment manager, which may be either an individual or a company. By analyzing a client’s objectives and risk tolerance, investment managers may devise a strategy for allocating a client’s portfolio among various asset classes, such as stocks and bonds. Managers are responsible for making investment purchases and sales on behalf of their clients and keeping them updated on the portfolio’s overall performance.

Some portfolio managers also double as financial planners, offering comprehensive guidance on matters such as budgeting, investing, taxes, and insurance. Others work with high-net-worth customers to coordinate the efforts of other specialists, such as attorneys and accountants, to meet their financial planning and investment management requirements. This is often referred to as wealth management. In addition to investment management, wealth management provides services in the areas of estate and tax planning, accounting, and retirement planning. Investment management might be useful if you need assistance with your IRA. In this case, full-service wealth management would be a tad too much.

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Pros and Cons of Investment Management

Though the investment management profession may produce attractive profits, there are also significant challenges associated with establishing such a business. Investment management businesses’ profits are very sensitive to the direction of the markets. Because of this intrinsic link, the company’s bottom line is directly tied to stock prices. If the value of the firm’s assets drops significantly relative to its constant operating expenses, the business may see a drop-in revenue. Additionally, customers might be impatient in difficult times and bad markets, and even above-average fund performance might not be enough to keep their account afloat.


  • Professional analysis
  • Full-time diligence
  • Ability to time or outperform market
  • Ability to protect portfolio in down times


  • Sizeable fees
  • Profits fluctuate with market
  • Challenges from passively managed vehicles, robo-advisors


When To Hire An Investment Manager

It’s usual to have a jumble of investing accounts – a few IRAs, a handful of old 401(k)s from previous employment, and that brokerage account you created after seeing a Warren Buffett documentary. Investment management may simplify your financial life by merging accounts from many businesses under one roof, making it simpler to carry out a consistent investment strategy.

Even if your assets are housed in a single account, investment management is beneficial if:

  • You lack confidence in making investment choices on your own.
  • You’d want someone else to monitor your portfolio and rebalance assets if the mix deviates from the initial formula.
  • You’re dealing with complicated concerns like inheritance, retirement income planning, tax strategies, or legacy planning.
  • In addition to portfolio management, you want an advisor to assist you with other financial requirements such as cash-flow planning, insurance, or debt management.


You’ve had a large shift in income or a major life event (such as getting married or having a child).

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Investment Managers And Portfolio Structures

Asset Allocation

The many classifications of asset classes are fiercely discussed, but four frequent groupings are stocks, bonds, real estate, and commodities. Investment management businesses are compensated for the exercise of distributing money among various assets (and among individual securities within each asset class). Asset classes display various market dynamics and interaction effects; hence, allocating money across asset classes has a substantial impact on the fund’s performance.

Long-term returns

It is critical to examine the facts on long-term returns to various assets as well as holding period returns. For example, during extremely long holding periods (e.g., 10+ years) in most countries, stocks have outperformed bonds, while bonds have outperformed cash. This is because shares are riskier (more volatile) than bonds, which are riskier than cash, according to financial theory.


Fund managers examine the degree of diversity that makes sense for a specific client (given its risk preferences) against the backdrop of asset allocation and develop a list of anticipated holdings appropriately. The list will reveal how much of the money should be invested in each stock or bond. Effective diversification necessitates the management of the connection between asset and liability returns, internal portfolio concerns (individual holdings volatility), and cross-correlations between returns.

Why Is Investment Management Important?

Through prudent investing, you may leave a legacy of financial security to future generations. In addition, the sooner you begin, the better. Over time, the value of money declines due to inflation. To put it another way, you might end up losing money in the long term if you don’t invest in a manner that helps your money grow.

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Content provided by Paradox Media.


This information is not intended to substitute for specific individualized tax, legal, or investment planning advice. Neither Royal Alliance Associates nor its representatives or employees provide legal or tax advice. If legal or tax advice or other expert assistance is required, the service of a currently practicing professional should be sought.

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