Pros & Cons of Hiring an Outside Investment Manager
Pros & Cons of Hiring an Outside Investment Manager
By: Richard A. Dobbs, Vice President

Some corporate treasurers are turning to outside investment managers in a quest to seek higher returns on their portfolios. Why? The capital markets are complex. As a result, making financial decisions, choosing appropriate investments, and obtaining an acceptable return are no longer straight-forward tasks for an in-house cash manager.

Modifying maturities, diversifying into international money market securities, or using more sophisticated investment strategies are options that may potentially increase returns. Yet the complete picture of rewards and risks is not always clear and with many treasury staffs reduced in size, evaluating and implementing one or more of these strategies can be virtually impossible.

The upshot: Many corporations turn to external investment managers to invest their corporate cash and/or pension cash portfolios. But how do you know whether hiring a manager is the right thing for your company?

Why Hire an Outside Manager?

Typically, hiring an external manager will result in an increase in convenience and a time savings. While beneficial, the chief reason for hiring is the expectation that fees paid may lead directly to an increase in returns - even though there is no guarantee that an outside professional can deliver better results. An outside manager can benefit your organization in a number of ways:

Management fees are a variable cost, fluctuating with the size of the portfolio. For instance, if the portfolio is used for an acquisition the fee disappears at the conclusion of the transaction. Hiring an in-house staff member or allocating a portion of a person's time to this responsibility represents an ongoing cost, regardless of the portfolio size.

Additionally, the level of accountability in meeting investment goals and conforming to guidelines is often greater with an outside manager than realistically can be imposed on a staff member, especially if this is one of many of that person's responsibilities.

When Not to Hire a Manager

No manager is a miracle worker. Just as there are compelling reasons to consider hiring a manager, there are situations where a manager will not be able to add value over in-house management.

A full-time investment professional may be able to provide better investment results than your in-house staff. Each company's situation is unique. As with any business decision, weigh the pros and cons objectively. Understand how a manager adds value, set realistic goals and expectations, and avoid short-run solutions.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.


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