Fri | Oct 23, 2020

Oran Hall | Searching for a portfolio manager

Published:Sunday | September 27, 2020 | 12:16 AM


QUESTION: I am enquiring about the Jamaica Stock Exchange as I would like to invest in the market using a broker that can manage my portfolio with reasonable costs and with a level of diligence. I want to acquire a broker who is small and independent, or should I use the companies listed on the JSE website, such as NCB Capital Markets, JMMB Securities, and Barita Investments? Please feel free to reference any good brokers that provide a good service on a low budget.

– Jason

FINANCIAL GLEANER: A stockbroker is a company or person authorised to buy and sell listed securities on the stock exchange on behalf of their clients, such as individuals, pension funds, and companies, and on their own behalf. Stockbroking companies must be members of the stock exchange and are called member-dealers of the stock exchange.

They are also authorised to bring companies and listings to the market. Individuals who are stockbrokers must be employees of a stockbroking company and act as its agents.

Stockbroking companies must also be licensed by the Financial Services Commission, FSC, to carry on the business of dealing in securities, which includes buying and selling securities as agents for their clients, as principals for their own accounts, and placing and underwriting securities. The FSC also licenses individuals as dealers, and companies applying for a dealer’s licence must have at least one director who has a dealer’s licence or investment adviser’s licence. Additionally, it registers dealer representatives.

Member-dealers of the stock exchange are also called broker-dealers and, apart from dealing in securities, provide investment advice to their clients, conduct and publish investment research, and raise capital for companies. Some do manage portfolios for their clients, but this is not their primary function. It is clear to me that many people do not fully grasp what a stockbroker does as I have heard investors complain that they bought stocks, the price fell, and their broker did not tell them to sell.

Stockbrokers do not have the time to monitor the portfolios of their clients the way many investors expect. Further, they cannot assume that their clients want to sell at a particular point. Can you imagine what would happen if they decided to call their clients to sell when particular stocks started to look shaky?

Investors should note that investing is a long-term activity, so they should be prepared to be in the market for the long haul, though not necessarily forever.

Generally, investors make their own decisions to buy and sell with, in many cases, advice from the stockbrokers but may enter into a formal arrangement with a broker to manage their portfolios if the stockbroker offers such a service.

There are other licensed securities dealers who offer portfolio-management services, along with other services. They buy and sell a wide range of securities for their clients, but because they are not dealer-members of the Jamaica Stock Exchange, they do not trade on them but must engage the stockbrokers to execute orders that pass through the stock exchange.

You can find the names and contact information of some of these companies and stockbrokers under the heading 'Investment Advisory & Securities Services' in the telephone directory. Some of these securities dealers give a good description of the services they offer, and you may check their websites for a closer look at them. To be better able to identify them, look for the companies that say they offer portfolio services, asset-management services, or personalised portfolio-management services.

As you have acknowledged, professional portfolio management services cost. Generally, the management fee is a percentage of the value of the portfolio. The rates and arrangements differ, so it is up to you to make your own enquiries about the services and charges.

Recognise, also, that it costs to execute orders and that the trading expenses, including the stockbroker’s commission, are borne by the client, not the portfolio manager, just as you would pay for the execution of orders when you manage your own portfolio and place your orders with a stockbroker.

Generally, the portfolio managers operate on a discretionary management arrangement, whereby it is the fund manager who makes the decisions after establishing the goals, risk tolerance, and overall profile of the client. There are instruments for determining these.

You should understand that a change in your situation may impact your portfolio and how it is managed, so you should advise the portfolio manager of any material change in your situation.

Establish up-front at what times in the course of the year you will get a full report on your portfolio and what it will include. Determine, also, what other reports will be made available to you. Will the manager provide information on the economy and the market so you can better understand what is happening, for example? And establish the payment arrangements very clearly before signing the contract.

The above relate to a portfolio that is uniquely yours and managed as such, but it is also likely that a fund manager may offer a pooled fund facility whereby your funds are combined with the funds of other investors. Where this is available, have a full discussion with the fund manager about the various arrangements before deciding which option suits you.

Ultimately, responsibility for the portfolio is yours. It is your portfolio, so you should take a very keen interest in it. The bottom line is not who is charging the cheapest rate. Just as important is what you get for what you pay.

Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.