Monday, October 8, 2012

The Magic Words of Money Management Part 4: “Partner”

The Magic Words of Money Management Part 4:  “Partner”

In the past three posts, we explored the words that make the product offering enticing (proprietary, customized, best ideas).  Now it’s time for the money manager to convince you that he’s a really good guy looking out for you.  It’s an excellent tactic, since you want to do business with someone you like and trust.   Therefore, this week I am going to analyze the following terms: partnership, alignment, transparency, and insights.  By the end of the week, you’ll have mastered these terms and you will be fully qualified to be a senior executive at a money management firm.  Senior executives like to talk to prospective clients using these terms.

Fund Merger (1999)

At some point in the presentation, you’ll hear the simple phrase, “We want to be your partner.”  For even more impact, and if the potential client has a lot of money, the money manager is going to want to make you his “strategic partner.”  Partnership implies some sort of two-way relationship, but that’s not what the money manager has in mind.  However, he doesn’t really want you to be his partner.  You are going to be a client with limited rights, but he doesn’t want you think about that until after you’ve signed up.

If you invest in a hedge fund, private equity fund, or real estate fund, legally you will be called a  “limited partner,” and you’ll want to maintain that status; it limits your liability to the amount of your investment in the fund should something go wrong.  However, in most of these alternative funds the money manager (general partner) will make sure that you are as limited as possible.  For example, in most cases you’ll only be able to sue the manager if he commits gross negligence.  You might not even be able to sue as the manager may insist on arbitration. Your access to information and reports will be limited.  The circumstances under which you and your fellow limited partners can replace the money manager will be tightly circumscribed.  These limitations are perfectly acceptable if the fund is successful, but if something goes wrong you won’t have many options.  When you really need answers, you’ll discover that you’re indeed a very limited partner.

Even if the investment is not structured as a legal partnership, money managers like to call their clients “partners.”  And in embracing you as a partner, the money manager will probably toss in the word “fiduciary”, as in “we take our fiduciary obligation seriously.”   The manager had better take his fiduciary obligation seriously, since it his legal duty to act in the best interest of his clients.

As a money management executive, I used the word “partnership” repeatedly in trying to woo clients, and I thought I was utterly convincing.  When I became the Chief Investment Officer for the North Carolina System about ten years ago, I sat on the other side of the table as manager after manager plied me with the plea to become his partner.  In my new role, I could finally see that this was obviously just a cheap pick-up line.   Then again, marketing money management services is all about seduction. 

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