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Investing 101: Fire Your Money Manager

NEW YORK ( TheStreet) -- With 2013 now in the rearview mirror, this is the time of the year when some investors will gather at their coffee tables with their legal pads and scattered brokerage statements ready to assess their investing/trading performances for the year. Chances are they already had an idea. But why not make it official?

There will, however, be another group of investors who will be on the phone with their broker, financial planner or money manager -- someone they've entrusted with their hard-earned money to do for them what they believed they were incapable of doing for themselves. Fairly or unfairly, issuing a performance grade for that person -- as you can imagine -- is a little bit different from the grade you would give to yourself. After all, you're not the paid expert.

With the Dow, Nasdaq and S&P 500 all breaking performance records throughout the course of the year, I believe if a money manager was not able to make money in this market, she/he does not deserve the license they've been granted. Nevertheless, with the market making winners and losers out of everyone at some point or another, there is certain to be plenty of realized losses for 2013.

However, that doesn't mean the investor should accept the excuses that the money manager will typically give to justify his/her underperformance, much less for losing an investor's money in one of the strongest bull markets Wall Street has ever seen.

I will grant that performance outcomes are not always cut and dry and some results will be based on what the investor first dictated her/his investment objectives to be. But more often than not, the money manager will exploit every opportunity to paint that performance in a different light.

In a market where the Dow soared 26% and the Nasdaq added close to 40%, the money manager will make, say, a 10% gain appear more impressive than it really is. Never mind the fact that had you saved all the money paid in fees/commissions for the manager's expertise throughout the year, you would have earned back that same accumulated 10% by simply kept your money in savings account.

On the flip side, you can expect all sorts of excuses for any losses incurred during the year. And you can expect that these excuses will prey on your limited knowledge of the financial markets and any other personal information the money manager might use to disguise her/his own incompetence or miscalculations. Worse, some managers will try to create these so-called "gray areas" when there aren't any.

But investors shouldn't be fooled. These managers know all too well that the financial market is a bottom line business -- only the net results matter. But when faced with questions about their poor performances, you can expect to hear why it was not their fault and how somewhere along the way, "the market took a wrong turn." That happens to be one of the most popular cited excuses. That excuse won't work this year, though, given all of the market-beating records seen in the indexes in 2013.

Next, you will be told that the reason the asset under her/his management underperformed is due to the media and critical articles written by financial writers like me -- also known as "bashers." Worse, some managers will lower themselves to blaming short-sellers and day traders for these "unexpected dips." This is when they've stopped blaming high gas prices, interest rates, the Fed and Europe.

Investors, then, should seize the opportunity to remind the money manager of why she/he was hired in the first place -- to anticipate these turns and make the necessary adjustments. I'm not suggesting that there aren't good managers that are willing to accept responsibility for their failures. But investors shouldn't accept their excuses -- only explanations for why the asset underperformed.

The way I see it, it's bad enough to have lost someone's hard-earned money after they've trusted a market expert with years of experience. But there's never a good reason to cheat the investor out of a legitimate learning opportunity by deflecting blame to things/issues that have had little to do with the real cause behind the loss.

In these situations, an honest money manager should admit fault for either picking poor companies or for having missed on some real winners. That said, there are certain situations where the manager approached the asset/assets based on the investor's position in life and/or their stated objectives. And this is where the explanation and conversations should begin.

Even then, investors should be particularly suspicious of any manager that will use such a scenario to blame the investor for those decisions. While the investor did sign on the dotted line whereby declaring that they understand the risks, the investor should never be told it's their fault for a manager's poor performance. Someone once said, "I can do bad by myself." Not only is that true, but it's always cheaper.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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