If you need a professional manager for your money, George Daniels believes, there are two people you should get to know: the investment manager you are considering and yourself.
A broker with Robinson Humphrey/American Express in Birmingham, Ala., Mr. Daniels is also a partner in Investment Direction Associates. IDA acts as a financial consultant to Robinson Humphrey and looks for money managers to handle investment accounts for individuals and retirement plans for corporations. He and his partner then monitor the performance of these managers for some 225 clients.
Daniels says many individuals do not adequately look into the investment manager's track record, expertise, net worth, or integrity. At the same time, they often forget to examine their own investment goals, financial plans for the future, and tolerance for risk.
One key to finding a competent investment manager, he believes, is to look at the track record. The length of this record depends on the investment. For real estate, he goes back 10 or 11 years; for oil and gas investments, 5 or 6 years will do; and for stocks and bonds, he returns to the 10- to 11-year standard.
''I look back to 1973-74 for stocks,'' he says. ''That was really the last bear market we had. We've basically been in a bull market since 1975. . . . It's been hard to be terribly, terribly wrong in the last eight or nine years. Sure, you could have had some bad picks, but overall, the market's been pretty kind. That's why I go back at least to '73.''
If the manager of the investment has a long and good track record, it is fairly likely he will meet the other criteria, although these standards are still worth checking.
One is integrity. There are objective ways to judge this, and subjective ways. The objective methods include looking at the manager's record books, or having your accountant do it, to make sure ''they (the books) have been taken care of properly''; talking with present and former clients to see how they've been treated and if the returns were overstated; and talking with competitors. ''If a competitor says, 'He's tough as nails, he drives a hard bargain, but he's fair,' you're probably getting a good picture,'' Daniels notes.
How the manager is paid also makes a difference, he says. If real estate managers take their ''cut'' at the end of a deal instead of the beginning, this is usually an indication of their own confidence in its long-term prospects. The manager should also have a net worth that is large enough for him to stay with the project during bad times as well as good.
You should also ask how much of the money is going into the project itself. In an oil drilling program, for example, 85 to 90 percent of the capital should go into actual drilling and development, with a minimum of it paying for administrative costs and commissions. The managers in both real estate and oil/gas programs should have some of their own money invested in them and be able to absorb 15 to 20 percent of the front-end costs.
There is a subjective measurement, too, Daniels believes, but it takes time to develop. ''When you're sitting across the table from these people, after a while you start to get a feel for it. You can feel if the thing is real or if he's just blowing smoke. . . . There are a lot of opportunities to rip off a client in real estate and oil and gas.''
Daniels says that after you've gotten to know the investment managers and the investment they're peddling, you should examine yourself as an investor. He points out that many investors don't have a ''game plan'' that includes a time frame for reaching their objectives. People should know when they're going to need the money they expect the investment to generate. It may be needed in a few years for college expenses or in a few decades for a more comfortable retirement.
A client's tolerance for risk is another key factor, Daniels notes. ''A lot of this is education. I sit down with a client and try to tell them the risks and rewards of various kinds of investments. After that, they tell us what they feel comfortable with, the kinds of investment, the risks.''
Sometimes, though, ''people will tell us things that aren't true. They believe they are speculative, but when they get into the investment they get nervous every time it moves down a bit.'' These people will call the manager several times a week, he says, ''and we never get anything done.'' Depending on the investment and their confidence in the manager, Daniels says, people should have the fortitude and financial strength to stick with it for a long haul.
One way to help avoid this problem, he suggests, is to know where you stand financially. If you don't have adequate resources, you may not be able to shift money from one investment to another if circumstances call for it, or you may not be able to take advantage of opportunities when they come up. He says a good investment manager should be just as willing to point out your financial weaknesses as your strengths.
Although the clients he finds investment managers for have annual incomes of group. ''I don't think there's a cutoff point for following good investment rules,'' he concludes.
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