Is Your Portfolio Manager Worth the Money He's Paid?

Portfolio managers are generally highly educated and highly intelligent financial minds. They are in a very competitive industry, in which their returns directly impact their salaries and future careers. One bad year can crush a portfolio manager. A good year can make her highly desirable, opening up doors to increased profits with other funds. Many feel portfolio managers are overpaid, but the fact is there are few qualified for the role, and the job is very challenging.

Qualified Portfolio Managers

Even with more people graduating from finance programs today than in the past, the fact of the matter remains that very few individuals are truly qualified to be portfolio managers. It takes an individual who can direct investments by balancing client expectations and market trends to make a truly successful portfolio manager. Many financial analysts and advisers can pick top investments, but not all can meet client expectations for both risk and reward on a consistent basis. Fund managers need a lot of experience in the industry, and they have to have the desire to perform what is a very stressful and challenging job.

Stress of a Manager's Role

A portfolio manager can be the most loved person in the world one day and the most hated the next. This is the life of a person in charge of making investments for other people. Even the best fund managers will sometimes fail, and this is the nature of the job and of the market as a whole. In order to stay on top despite failure, a portfolio manager will likely work very long hours, often giving up other pleasures in pursuit of profits for clients. Furthermore, a manager's pay is often directly tied to performance, creating another element of stress in the situation.

Competition among Funds

One of the reasons portfolio managers make so much money is the competition in the marketplace. If a portfolio manager is successful, another financial firm can swoop in and offer a higher compensation to bring her over to its open position. Many clients will follow the manager, bringing immediate profits to the other financial firm. A successful portfolio manager is a hot commodity, representing gains not just for clients but for the firms as well. If your manager is doing a good job, her compensation may be increased significantly to prevent another firm from enticing her away and taking your business.

Balancing Pay and Profit

Funds use many different pay strategies to compensate a portfolio manager effectively. There is typically a moderate salary, still potentially high when compared to salaries in other positions, but not representing overcompensation. Then, there is either a bonus or commission that is based on profits. The more successful the manager, the higher the profits. If you are concerned that your fund manager may be paid too much, meaning he is compensated for taking big risks, you can seek out a portfolio manager who operates with an up-front fee or other service charges. These managers tend to make a little less, but they also have less incentive to generate big returns.

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