Q My friends are bragging about the great returns their investment portfolios are having. Apparently, they have been getting more than 10% year after year. I have been with the same money manager for years and my portfolio is not doing so well; I get about 5% to 6% each year. Should I fire my money manager and move my money to one of my friend’s managers? I like my manager, but I really need to make more so I can achieve my retirement goals.

A Working with a money manager is mostly about relationships and, second to that good relationship is return. Yes, the markets have been performing extremely well for a long time now, but I would submit that the return you are seeing is more about risk tolerance than the knowledge of your manager.

When we hire a money manager, we hire them either as a discretionary advisor or as a directed advisor. A discretionary advisor will sit down with you, talk about your goals, time horizon, risk tolerance, tax bracket and your personal investment experience. From there, the advisor will build an investment plan based on your outlined expectations. The recommendations will include allocations between equities (stocks), fixed income (bonds), real estate and cash. The advisor will form an investment policy and then have you approve the plan. The advisor then has the discretion to make investments based on the agreed upon investment policy.

From time to time the discretionary advisor will review performance and your overall plan with you and the two of you can make decisions about any changes. The key is a discretionary advisor has the authority to make changes in your portfolio from time to time to best fit with the investment policy you two have agreed upon. This means that the advisor will not need to call you each time they buy or sell something, and it also gives them the freedom to respond to rapidly changing market conditions.

Discretionary advisors are usually “fiduciaries” which means they must do what is in your best interest and, a discretionary advisor charges an annual fee for their services. The fee is usually based on the amount of money you have invested with them and generally runs around 1% of the value per year.

A broker is someone who can make recommendations but buying and selling must be directed by you. So, in other words, the broker must get your approval each time a trade is made. If you are extremely knowledgeable about investments, using a broker may be the best option for you. If you would prefer to offload the day-to-day decisions about your portfolio and what to buy or sell, you should retain the services of a discretionary advisor. A broker’s fee is usually commission based on the purchases and sales in the portfolio and, as mentioned, trades always require your approval.

So, the question is, what kind of relationship do you have with your money manager? Is your manager a fiduciary advisor and do you have a stated investment policy for your portfolio? Discuss your performance concerns with your manager and see if changes in allocation are recommended. It is most likely that your friends are more aggressively invested than you and, while their performance may be better than yours in a “good” market, if there is a downturn, a more aggressively invested portfolio will, most likely, experience the downturn to a greater extent than your more conservative portfolio.

As an aside, if you are the trustee of a trust you are managing for someone, or if you sit on a charity board, having a discretionary advisor is recommended for investments. When we act as a trustee or are on a board that has an endowment or other investments, we have a fiduciary responsibility for those investments. By engaging the services of a discretionary manager, we offload some of that risk and responsibility to the manager.

Liza Horvath has over 30 years of experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust management company. This is not intended to be legal or tax advice. If you have a question call (831)646-5262 or email liza@montereytrust.com