Building a Strong Investor-Manager Relationship

MILLBURN, N.J. (TheStreet) -- Are you an individual investor who's thinking about hiring a professional investment manager? Are you an investment adviser who constantly struggles between the need to deliver performance and the requirements to deliver a quality service to your client?

These are very delicate matters. The decision to entrust capital to a third party should not be taken lightly, and a manager's acceptance of that capital creates a relationship with an obligation to maximize return.

The primary objective of the manager is to consider the best interest of the client. Unfortunately, investors sometimes don't know what their best interests are. In addition, some managers -- Bernie Madoff comes to mind -- put their own self-interest above the interest of their clients.

Investors have to understand their own tolerance for risk. All too often I hear from clients or prospective clients that all they want to do is make money and not incur significant losses. Broad statements like this often lead to manager-client problems, miscommunication and a bad relationship. You don't walk into a doctor's office and tell them to make you better without letting the physician first perform a complete diagnostic examination. The same goes for investing. Brokers and investment advisers are under a duty of care to know their customers and transact accordingly. A meeting of the minds between client and manager must take place before the first dollar is invested.

The worst thing a patient can do is to interfere with a doctor. Imagine telling the doctor in the middle of an operation how to perform the procedure. But client feedback is necessary to the investment process in order to insure that the manager is staying within the boundaries of the investment plan. Of course, you have to draw the line somewhere, and the client is not a co-manager. I have dropped clients who insist on telling me what to buy and sell or who second-guess my decision-making.