How Fed rate hike will affect your finances

Credit cards

Most credit cards have a variable rate, which means there’s a direct connection to the Fed’s benchmark rate and card holders will feel an immediate pinch.

“Variable rate debt is where you are most susceptible as interest rates rise,” McBride said.

The average American has a credit card balance of $6,375, up nearly 3 percent from last year, according to Experian’s annual study on the state of credit and debt in America. Total credit card debt has reached its highest point ever, surpassing $1 trillion in 2017, according to a separate report by the Federal Reserve.

Tacking on a 25-basis-point increase will cost credit card users roughly $1.6 billion in extra finance charges in 2018, according to a WalletHub analysis. Factoring in the five previous rate hikes, credit card users will pay about $8.4 billion more in 2018 than they would have otherwise, WalletHub said.

However, for those with good credit, there are still opportunities to find a better rate or snag a zero-interest balance transfer offer to insulate yourself for a time from further rate hikes and “give yourself a tail wind toward debt repayment,” McBride said.

Mortgages

The economy, the Fed and inflation all have some influence over long-term fixed mortgage rates, which generally are pegged to yields on U.S. Treasury notes, so there’s already been a spike since the start of the year.

The average 30-year fixed-rate is now about 4.54 percent — up from 4.15 percent on Jan. 1 and significantly higher than the record low of 3.5 percent in December 2012.

With interest rates rising, adjustable-rate mortgages will certainly be heading higher, too, and those with some types of ARM loans “are sitting ducks for getting another increase,” McBride said.

Many homeowners with adjustable-rate home equity lines of credit, which are pegged to the prime rate, also will be affected. But unlike an adjustable-rate mortgage, these loans reset immediately rather than once a year.

For example, a rate increase of 25 basis points would cause borrowers with a $50,000 home equity line of credit to see a $10 to $11 increase in their next monthly payment, according to Mike Kinane, senior vice president of consumer lending at TD Bank.

Stocks and the dollar fall after Fed rate move

“President Trump’s trade barriers are causing concerns for the Fed, where policymakers believe [such measures] will put a break on growth and the market seems to agree,” says Paul Flood, portfolio manager of the Newton Multi-Asset Income Fund.

Hot topic

The dollar is slipping, stock markets are under pressure and there is sustained demand for US government debt after the Federal Reserve stuck by forecasts that it will lift interest rates by a total of three times in 2018.

Meanwhile, worries about the impact of a potential trade war on global growth is deepening a sense of unease, knocking stocks and adding to the appeal of safer assets.

As expected, the US central bank lifted the target range for the federal funds rate by a quarter point to 1.75 per cent. Policymakers’ projections pointed to an extra rate increase in 2019 and further tightening in 2020, and said inflation would accelerate. Nonetheless, talk that they would signal a total of four rises for this year proved wrong.

That left the dollar looking exposed, and the index tracking it fell to a 10-session low on Thursday to 89.524, taking it down 1 per cent over the last two sessions and leaving its fall over the week at 0.8 per cent.

The yield on the 10-year US Treasury is falling as investors buy into the debt. It is down 4.6 basis points at 2.861 per cent. That on 2-year Treasuries is down 1.7bp at 2.299 per cent.

Equities

European stocks are falling, with selling gathering pace after mixed showing in Asia.

Frankfurt’s Xetra Dax 30 is down 1 per cent, with London’s FTSE 100 0.6 per cent weaker. The Europe-wide Stoxx 600 is down 0.8 per cent.

Japan’s Topix swung between gains and losses to rise 0.7 per cent overall.

Hong Kong’s Hang Seng fell 1.1 per cent. The CSI 300 index of Shenzhen and Shanghai stocks fell 1.1 per cent as the latest threats of trade curbs from the Trump administration were said to be designed to stop China from stealing the intellectual property of American business, and after the Chinese central bank raised short-term rates.

US stocks are expected to fall further after weakening over a choppy session on Wednesday. Futures trade is pointing to losses of 0.7 per cent for the S&P 500 after a 0.2 per cent slip.

Forex

The pound is up 0.2 per cent at $1.4170 ahead of a rate call from the Bank of England, at which it is expected to leave interest rates on hold, with analysts thinking the next increase will come in May.

The euro is up 0.4 per cent at $1.2384, while the yen is 0.3 per cent stronger at 105.68.

WHAT TO CONSIDER WHEN DEVELOPING YOUR MUTUAL FUND PORTFOLIO

There are investors for all tastes: from those who are self-managed, decide what to invest their money in and even carry out the operation themselves, to those who rely on specialized managers of a bank or entity to invest their money, decide which assets it is better to invest in and move it around according to the circumstances. Either way, what is clear is that the individual investor wants to be more and more informed about their investments, and it is a very healthy and almost mandatory exercise to be aware of the funds in which your manager has decided to invest. Building a portfolio of funds is a strategic exercise in which many factors need to be taken into account. Whether you’re going to do this directly or rely on specialists, you want to know what the basic factors are to take into account to track your investments:

Risk profile

The starting point is to know what your risk profile is. Between being a conservative and a risky investor, there is a wide range of greyscale that will depend on the objective of your investment, your vital moment, how much you are willing to risk, your tax profile and other elements of context. It is important to tailor the assets in which the fund or funds you choose for your money invest to your risk profile. In this way, funds investing in riskier assets, such as bonds, will be more suitable for conservative investors and, as the risk to be assumed increases in order to obtain better returns, the share of investment in equities, for example, will grow.

Diversification

The effect of diversification is significant, which is why it is important to know the main categories and typology of funds that exist, since the supply today is very wide. With a focus on diversification, alternative management funds are an important part of the portfolio. Regardless of the risk of the same, we will always find funds in accordance with the investor profile that allow us not to have all the risk in the same asset or geographical area, but to have a balanced portfolio that allows us to compensate for unexpected behaviour in any asset or area. The distribution of assets, such as the weight given to equities versus bonds, is a key factor on which the return obtained will depend and must always be aligned with the investment horizon and the investor’s risk tolerance.

Investment Horizon

It’s basically about deciding what term you want to invest in. Generally speaking, when talking about funds, we usually think of a medium and long term investment so that the investment makes sense, but it is important to consider how many months or years you want to invest.

Quality of the background

Measuring the quality of a fund in which you are going to invest your money is a good practice and for this you will have to dive into the pages that make this information available to the investor. We must also take care of the type of funds we choose, especially in cases where there is a type of distribution and distribution, whether or not we want to receive periodic income.

There are various platforms that compare mutual funds by performance and by category; one of the best known is Morningstar, which bases its hierarchy on’stars’ and thus gives 5 stars to the top 10%, 4 stars to the next 22.5%, 3 to the next 35%, 2 to the next 22.5% and one to the worst performing 10%. Others analyse the performance achieved or compare fund managers, giving each one a rating. Other key figures that can be taken into account are the volatility, sharpe ratio, alpha or beta of the fund.

Fund managers

Knowing the professionals who manage the fund or funds you are going to invest in is important, as they will make the investment decisions about your money. If you take the trouble to find out more about the manager of your fund, you will know what his management style is and how his investment preferences are evolving. If they are also the so-called’author’s funds’ with even greater reason, as they are usually headed by’star managers’ who, if at any given time, leave the fund, they can lead to a change in the management of the fund and even the departure of a large number of participants.

Taxation and commissions

It is important to know the taxation of the different products in which you can invest your money and how the returns, positive or negative, you get from your investment can influence your accountability to the Treasury. Some products may be more convenient than others, so it is necessary to take this into account, as well as the commissions that entities may charge on each of the products.

Portfolio simulation

We currently live in an environment of low volatility across all assets. If we simulate the portfolio to see how it can work, we need to look at other risk ratios such as the historical maximum fall in the portfolio.

What is asset management?

In general terms, asset management corresponds to based on principles such as knowledge, planning, organisation and integrated management. Its objective is to optimize the performance of these assets and minimize their cost, as well as improve the service offered.

In the exclusively financial field, asset management focuses on the responsible management of investment assets by financial institutions in order to meet specific investment objectives, all for the benefit of clients.

If the key to financial advice is how to professionally help a client meet his or her financial needs, asset management is about making investment management decisions, taking into account the different risk profiles of investors.

The provision of asset management services mainly includes analysis of financial statements, selection of assets and securities, implementation plan in securities portfolios and ongoing monitoring of investments.

Andbank is present in the field of asset management through the fund management company Andbank Asset Management, which has experts in investments in the various financial markets around the world. From this management company, and through its asset managers, Andbank provides a global view of the markets and offers a wide range of investment strategies. Its maxim is to focus portfolios to preserve and grow client capital and to calibrate investment opportunities so as to extract the maximum investment potential with the least possible risk.

There are five key milestones in the investment process of Andbank Asset Management:

The definition of the objectives together with the client, which deals with aspects such as the objective return and the risk budget; the investment horizon, liquidity and restrictions and the identification of investment needs.
The proposal of several alternatives for the management of your assets.
The joint choice of the strategy that best suits your profile, taking into account your personal and professional situation, your values, your tastes and your tolerance for risk.
The investment according to the defined strategy, using sophisticated decision making tools.
Monitoring your portfolio, including comprehensive reporting with transparent information and joint evaluation of investment

Payday loan

A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a small, short-term unsecured loan, “regardless of whether repayment of loans is linked to a borrower’s payday.” The loans are also sometimes referred to as “cash advances,” though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Payday advance loans rely on the consumer having previous payroll and employment records. Legislation regarding payday loans varies widely between different countries, and in federal systems, between different states or provinces.

To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, and some have very few restrictions on payday lenders. In the United States, the rates of these loans used to be restricted in most states by the Uniform Small Loan Laws (USLL), with 36–40% APR generally the norm.

There are many different ways to calculate annual percentage rate of a loan. Depending on which method is used, the rate calculated may differ dramatically; e.g., for a $15 charge on a $100 14-day payday loan, it could be (from the borrower’s perspective) anywhere from 391% to 3,733%.

Although some have noted that these loans appear to carry substantial risk to the lender, it has been shown that these loans carry no more long term risk for the lender than other forms of credit. These studies seem to be confirmed by the United States Securities and Exchange Commission filings of at least one lender, who notes a charge-off rate of 3.2%

Pricing structure of payday loans

The payday lending industry argues that conventional interest rates for lower dollar amounts and shorter terms would not be profitable. For example, a $100 one-week loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest, which would fail to match loan processing costs. Research shows that on average, payday loan prices moved upward, and that such moves were “consistent with implicit collusion facilitated by price focal points”.

Consumer advocates and other experts argue, however, that payday loans appear to exist in a classic market failure. In a perfect market of competing sellers and buyers seeking to trade in a rational manner, pricing fluctuates based on the capacity of the market. Payday lenders have no incentive to price their loans competitively since loans are not capable of being patented. Thus, if a lender chooses to innovate and reduce cost to borrowers in order to secure a larger share of the market the competing lenders will instantly do the same, negating the effect. For this reason, among others, all lenders in the payday marketplace charge at or very near the maximum fees and rates allowed by local law.

Payday loans are legal in 27 states, and 9 others allows some form of short term storefront lending with restrictions. The remaining 14 and the District of Columbia forbid the practice. The annual percentage rate (APR) is also limited in some jurisdictions to prevent usury. And in some states, there are laws limiting the number of loans a borrower can take at a single time.

As for federal regulation, the Dodd–Frank Wall Street Reform and Consumer Protection Act gave the Consumer Financial Protection Bureau (CFPB) specific authority to regulate all payday lenders, regardless of size. Also, the Military Lending Act imposes a 36% rate cap on tax refund loans and certain payday and auto title loans made to active duty armed forces members and their covered dependents, and prohibits certain terms in such loans.

The CFPB has issued several enforcement actions against payday lenders for reasons such as violating the prohibition on lending to military members and aggressive collection tactics. The CFPB also operates a website to answer questions about payday lending.In addition, some states have aggressively pursued lenders they felt violate their state laws

Payday lenders have made effective use of the sovereign status of Native American reservations, often forming partnerships with members of a tribe to offer loans over the Internet which evade state law.However, the Federal Trade Commission has begun the aggressively monitor these lenders as well. While some tribal lenders are operated by Native Americans, there is also evidence many are simply a creation of so-called “rent-a-tribe” schemes, where a non-Native company sets up operations on tribal land.

Loan shark

loan shark is a person or body who offers loans at extremely high interest rates usually without holding relevant authorization from the local financial regulator (illegally). The term usually refers to illegal activity, but may also refer to predatory lending with extremely high interest rates such as payday or title loans.

Unfortunately, an unintended consequence of poverty alleviation initiatives can be that loan sharks borrow from formal microfinance lenders and lend on to poor borrowers.[9] Loan sharks sometimes enforce repayment by blackmail or threats of violence. Historically, many moneylenders skirted between legal and extralegal activity. In the recent western world, loan sharks have been a feature of the criminal underworld.

In the United States, there are lenders licensed to serve borrowers who cannot qualify for standard loans from mainstream sources. These smaller, non-standard lenders often operate in cash, whereas mainstream lenders increasingly operate only electronically and will not serve borrowers who do not have bank accounts. Terms such as sub-prime lending, “non-standard consumer credit”, and payday loans are often used in connection with this type of consumer finance. The availability of these services has made illegal, exploitative loan sharks rarer, but these legal lenders have also been accused of behaving in an exploitative manner. For example, payday loan operations have come under fire for charging inflated “service charges” for their services of cashing a “payday advance”, effectively a short-term (no more than one or two weeks) loan for which charges may run 3–5% of the principal amount. By claiming to be charging for the “service” of cashing a paycheck, instead of merely charging interest for a short-term loan, laws that strictly regulate moneylending costs can be effectively bypassed.

Payday lending

Licensed payday advance businesses, which lend money at high rates of interest on the security of a postdated check, are often described as loan sharks by their critics due to high interest rates that trap debtors, stopping short of illegal lending and violent collection practices. Today’s payday loan is a close cousin of the early 20th century salary loan, the product to which the “shark” epithet was originally applied, but they are now legalised in some states.

A 2001 comparison of short-term lending rates charged by the Chicago Outfit organized crime syndicate and payday lenders in California revealed that, depending on when a payday loan was paid back by a borrower (generally 1–14 days), the interest rate charged for a payday loan could be considerably higher than the interest rate of a similar loan made by the organized crime syndicate.

What is a robo-advisor?

Robo-advisors or Robo-advisers are a class of financial adviser that provide financial advice or Investment management online with moderate to minimal human intervention.  They provide digital financial advice based on mathematical rules or algorithms. These algorithms are executed by software and thus financial advice do not require a human advisor. The software utilizes its algorithms to automatically allocate, manage and optimize clients’ assets.

There are over 100 robo-advisory services. Investment management robo-advice is considered a breakthrough in formerly exclusive wealth management services, bringing services to a broader audience with lower cost compared to traditional human advice. Robo-advisors typically allocate a client’s assets on the basis of risk preferences and desired target return. While robo-advisors have the capability of allocating client assets in many investment products such as stocks, bonds, futures, commodities, real estate, the funds are often directed towards ETF portfolios. Clients can choose between offerings with passive asset allocation techniques or active asset management styles.

The tools they employ to manage client portfolios differ little from the portfolio management software already widely used in the profession. The main difference is in distribution channel. Until recently, portfolio management was almost exclusively conducted through human advisors and sold in a bundle with other services. Now, consumers have direct access to portfolio management tools, in the same way that they obtained access to brokerage houses like Charles Schwab and stock trading services with the advent of the Internet.Robo-advisors are extending into newer business avenues.

The customer acquisition costs and time constraints faced by traditional human advisors have left many middle-class investors underadvised or unable to obtain portfolio management services because of the minimums imposed on investable assetsThe average financial planner has a minimum investment amount of $50,000,while minimum investment amounts for robo-advisors start as low as $500 in the United States and as low as £1 in the United Kingdom In addition to having lower minimums on investable assets compared to traditional human advisors, robo-advisors charge fees ranging from 0.2% to 1.0% of Assets Under Managemenwhile traditional financial planners charged average fees of 1.35% of Assets Under Management according to a survey conducted by AdvisoryHQ News.

In the United States, robo-advisors must be registered investment advisors, which are regulated by the Securities and Exchange Commission. In the United Kingdom they are regulated by the Financial Conduct Authority.

What are the biggest robo-advisor?

As of October 2017, robo-advisors had $224 billion in assets under management.

The following are the largest robo-advisors by assets under management:

Company Country AUM (millions of US$)
The Vanguard Group U.S. 83,000
Charles Schwab Corporation U.S. 19,400
Betterment U.S. 9,058
Wealthfront U.S. 6,763
Personal Capital U.S. 4,344
Nutmeg Great Britain 751
Wealthsimple Canada 574
E-Trade U.S. 400
Ally Financial U.S. 18

Insurance broker

An insurance broker (also insurance agent) sells, solicits, or negotiates insurance for compensation. The largest insurance brokers in the world, by revenue, are Marsh & McLennan, Aon Corporation, and Arthur J. Gallagher & Co and Willis Group.

In the United States, insurance brokers are regulated by the states. Most states require anyone who sells, solicits, or negotiates insurance in that state to obtain an insurance broker license, with certain limited exceptions. This includes a business entity, the business entity’s officers or directors (the “sublicensees” through whom the business entity operates), and individual employees. In order to obtain a broker’s license, a person typically must take pre-licensing courses and pass an examination. An insurance broker also must submit an application (with an application fee) to the state insurance regulator in the state in which the applicant wishes to do business, who will determine whether the insurance broker has met all the state requirements and will typically do a background check to determine whether the applicant is considered trustworthy and competent. A criminal conviction, for example, may result in a state determining that the applicant is untrustworthy or incompetent. Some states also require applicants to submit fingerprints.

Once licensed, an insurance broker generally must take continuing education courses when their licenses reach a renewal date. For example, the state of California requires license renewals every 2 years, which is accomplished by completing continuing education courses. Most states have reciprocity agreements whereby brokers from one state can become easily licensed in another state. As a result of the federal Gramm-Leach-Bliley Act, most states have adopted uniform licensing laws, with 47 states being deemed reciprocal by the National Association of Insurance Commissioners. A state may revoke, suspend, or refuse to renew an insurance broker’s license if at any time the state determines (typically after notice and a hearing) that the broker has engaged in any activity that makes him untrustworthy or incompetent.

Because of industry regulation, smaller brokerage firms can easily compete with larger ones, and in most states, all insurance brokers generally are forbidden by law from providing their customers with rebates or inducements.

Insurance brokers play a significant role in helping companies and individuals procure property and casualty (liability) insurance, life insurance and annuities, and accident and health insurance. For example, research shows that brokers play a significant role in helping small employers find health insurance, particularly in more competitive markets. Average small group commissions range from two percent to eight percent of premiums. Brokers provide services beyond procuring insurance, such as providing risk assessments, insurance consulting services, insurance-related regulatory and legislative updates, claims assistance services, assisting with employee enrollment, and helping to resolve benefit issues. However, some states consider the provision of services that are unrelated to the insurance procured through the broker to be an impermissible rebate or inducement.

Negligence on the part of insurance brokers can have severe effects upon clients when they discover their insurance coverage is worthless, which in turn illustrates why retaining a competent insurance broker is so important. In one case, Near North Entertainment Insurance Services provided alternative rock band Third Eye Blind with a commercial general liability (CGL) insurance policy that excluded coverage for the “entertainment business.” After insurance coverage for a lawsuit was denied because Third Eye Blind was and is, after all, in the entertainment business, the California Court of Appeal ruled in a published opinion that the broker had a duty to advise the band it needed something more than a basic CGL policy.

Hedge fund

A hedge fund is an investment fund that pools capital from accredited individuals or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk-management techniques.[1] It is administered by a professional investment management firm, and often structured as a limited partnership, limited liability company, or similar vehicle. Hedge funds are generally distinct from mutual funds, as their use of leverage is not capped by regulators, and distinct from private equity funds, as the majority of hedge funds invest in relatively liquid assets.[4][5]

The term “hedge fund” originated from the paired long and short positions that the first of these funds used to hedge market risk. Over time, the types and nature of the hedging concepts expanded, as did the different types of investment vehicles. Today, hedge funds engage in a diverse range of markets and strategies and employ a wide variety of financial instruments and risk management techniques.

Hedge funds are made available only to certain sophisticated or accredited investors and cannot be offered or sold to the general public. As such, they generally avoid direct regulatory oversight, bypass licensing requirements applicable to investment companies, and operate with greater flexibility than mutual funds and other investment funds. However, following the financial crisis of 2007–2008, regulations were passed in the United States and Europe with intentions to increase government oversight of hedge funds and eliminate certain regulatory gaps.

Hedge funds have existed for many decades and have become increasingly popular. They have now grown to be a substantial fraction of asset management, with assets now totaling around $3 trillion.

Hedge funds are almost always open-ended and allow additions or withdrawals by their investors (generally on a monthly or quarterly basis). The value of an investor’s holding is directly related to the fund net asset value.

Many hedge fund investment strategies aim to achieve a positive return on investment regardless of whether markets are rising or falling (“absolute return”). Hedge fund managers often invest money of their own in the fund they manage.[10][11] A hedge fund typically pays its investment manager an annual management fee (for example 2% of the assets of the fund), and a performance fee (for example 20% of the increase in the fund’s net asset value during the year).[1] Both co-investment and performance fees serve to align the interests of managers with those of the investors in the fund. Some hedge funds have several billion dollars of assets under management (AUM)

Risk management
Investors in hedge funds are, in most countries, required to be qualified investors who are assumed to be aware of the investment risks, and accept these risks because of the potential returns relative to those risks. Fund managers may employ extensive risk management strategies in order to protect the fund and investors. According to the Financial Times, “big hedge funds have some of the most sophisticated and exacting risk management practices anywhere in asset management.” Hedge fund managers that hold a large number of investment positions for short durations are likely to have a particularly comprehensive risk management system in place, and it has become usual for funds to have independent risk officers who assess and manage risks but are not otherwise involved in trading. A variety of different measurement techniques and models are used to estimate risk according to the fund’s leverage, liquidity and investment strategy.Non-normality of returns, volatility clustering and trends are not always accounted for by conventional risk measurement methodologies and so in addition to value at risk and similar measurements, funds may use integrated measures such as drawdowns .

In addition to assessing the market-related risks that may arise from an investment, investors commonly employ operational due diligence to assess the risk that error or fraud at a hedge fund might result in loss to the investor. Considerations will include the organization and management of operations at the hedge fund manager, whether the investment strategy is likely to be sustainable, and the fund’s ability to develop as a company.

Fees paid to hedge funds
Hedge fund management firms typically charge their funds both a management fee and a performance fee.

Management fees are calculated as a percentage of the fund’s net asset value and typically range from 1% to 4% per annum, with 2% being standard They are usually expressed as an annual percentage, but calculated and paid monthly or quarterly. Management fees for hedge funds are designed to cover the operating costs of the manager, whereas the performance fee provides the manager’s profits. However, due to economies of scale the management fee from larger funds can generate a significant part of a manager’s profits, and as a result some fees have been criticized by some public pension funds, such as CalPERS, for being too high

The performance fee is typically 20% of the fund’s profits during any year, though they range between 10% and 50%. Performance fees are intended to provide an incentive for a manager to generate profits.Performance fees have been criticized by Warren Buffett, who believes that because hedge funds share only the profits and not the losses, such fees create an incentive for high-risk investment management. Performance fee rates have fallen since the start of the credit crunch.

Almost all hedge fund performance fees include a “high water mark” (or “loss carryforward provision”), which means that the performance fee only applies to net profits (i.e., profits after losses in previous years have been recovered). This prevents managers from receiving fees for volatile performance, though a manager will sometimes close a fund that has suffered serious losses and start a new fund, rather than attempting to recover the losses over a number of years without performance fee.

Some performance fees include a “hurdle”, so that a fee is only paid on the fund’s performance in excess of a benchmark rate (e.g. LIBOR) or a fixed percentage. A “soft” hurdle means the performance fee is calculated on all the fund’s returns if the hurdle rate is cleared. A “hard” hurdle is calculated only on returns above the hurdle rate. A hurdle is intended to ensure that a manager is only rewarded if the fund generates returns in excess of the returns that the investor would have received if they had invested their money elsewhere.

Some hedge funds charge a redemption fee (or withdrawal fee) for early withdrawals during a specified period of time (typically a year) or when withdrawals exceed a predetermined percentage of the original investment. The purpose of the fee is to discourage short-term investing, reduce turnover and deter withdrawals after periods of poor performance. Unlike management fees and performance fees, redemption fees are usually kept by the fund.

Investment management

Investment management is the professional asset management of various securities (shares, bonds and other securities) and other assets (e.g., real estate) in order to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations, charities, educational establishments etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchange-traded funds).

The term asset management is often used to refer to the investment management of collective investments, while the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as money management or portfolio management often within the context of so-called “private banking”.

The provision of investment management services includes elements of financial statement analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Coming under the remit of financial services many of the world’s largest companies are at least in part investment managers and employ millions of staff. It remains unclear if professional investment managers can reliably enhance risk adjusted returns by an amount that exceeds fees and expenses of investment management.

The term fund manager (or investment advisor in the United States) refers to both a firm that provides investment management services and an individual who directs fund management decisions.

According to a Boston Consulting Group study, the assets managed professionally for fees reached an all-time high of US$62.4 trillion in 2012, after remaining flat-lined since 2007.  Furthermore, these industry assets under management were expected to reach US$70.2 trillion at the end of 2013 as per a Cerulli Associates estimate.

The global investment management industry is highly concentrated in nature, in a universe of about 70,000 funds roughly 99.7% of the US fund flows in 2012 went into just 185 funds. Additionally, a majority of fund managers report that more than 50% of their inflows go to only three funds.

Investment managers and portfolio structures
At the heart of the investment management industry are the managers who invest and divest client investments.

A certified company investment advisor should conduct an assessment of each client’s individual needs and risk profile. The advisor then recommends appropriate investments.

Asset allocation
The different asset class definitions are widely debated, but four common divisions are stocks, bonds, real estate and commodities. The exercise of allocating funds among these assets (and among individual securities within each asset class) is what investment management firms are paid for. Asset classes exhibit different market dynamics, and different interaction effects; thus, the allocation of money among asset classes will have a significant effect on the performance of the fund. Some research suggests that allocation among asset classes has more predictive power than the choice of individual holdings in determining portfolio return. Arguably, the skill of a successful investment manager resides in constructing the asset allocation, and separate individual holdings, so as to outperform certain benchmarks (e.g., the peer group of competing funds, bond and stock indices).

Long-term returns
It is important to look at the evidence on the long-term returns to different assets, and to holding period returns (the returns that accrue on average over different lengths of investment). For example, over very long holding periods (e.g. 10+ years) in most countries, equities have generated higher returns than bonds, and bonds have generated higher returns than cash. According to financial theory, this is because equities are riskier (more volatile) than bonds which are themselves more risky than cash.

Diversification
Against the background of the asset allocation, fund managers consider the degree of diversification that makes sense for a given client (given its risk preferences) and construct a list of planned holdings accordingly. The list will indicate what percentage of the fund should be invested in each particular stock or bond. The theory of portfolio diversification was originated by Markowitz (and many others). Effective diversification requires management of the correlation between the asset returns and the liability returns, issues internal to the portfolio (individual holdings volatility), and cross-correlations between the returns.