Do you prefer discretionary or advisory investment management services? This is a common question when you first sign up with a wealth management firm. Before you reply, it is important to understand what both of these investment approaches are, and decide which better suits your individual needs, goals, and risk appetite
What Is Discretionary Investment Management?
Discretionary investment management is a form of wealth management through which investment decisions are made at the discretion of a professional wealth manager. It is essentially a hands-off approach, suitable for investors who lack the time, experience, or desire to actively manage their portfolio and wish to delegate this responsibility to a professional. If you opt for discretionary management services, the first thing the wealth manager will probably do – in order to understand your investment objectives and risk appetite – is to have you answer a questionnaire. Expect to be asked how much investment risk you are willing to take on, the amount of returns you aim to receive by taking that level of risk, and your preferred asset classes and markets.
Your wealth manager will then formulate a customised investment strategy that fits your preferences and risk profile, and you will have the opportunity to review this. After you sign off on this plan, your wealth manager will be responsible for all the investment decisions relating to your portfolio. You will not be required to provide consent for individual transactions. The majority of wealth managers offer discretionary services, and this style of investment management is the most popular choice among private clients.
What Is Advisory Investment Management?
Advisory investment management – a service provided by larger private banks, investment management firms, and specialist advisory boutiques – is a hands-on approach, suitable for those investors who possess the necessary expertise and initiative to take an active role in managing their own portfolios. With advisory services, the wealth manager will consult with you and provide investment strategy advice and guidance, but you will make the final buy-and-sell decisions and changes to your portfolio. In order to be able to provide you with personalised investment guidance, your wealth manager will first need to schedule a sit-down session with you to develop an understanding of your investment objectives and risk appetite
If you lack extensive experience in investing, are time-strapped, or are simply not inclined to get involved in managing their investment portfolio, the discretionary approach is probably the right one for you. By delegating the management of your portfolio to a wealth service professional, you are freed from the burden of making investment decisions on a day-to-day basis.
You will not be completely detached from your portfolio though. The wealth manager will contact you regularly to review and revise your investment strategy – this is necessary as your needs evolve over time.
At the same time, you can be assured that your assets are being handled by a highly qualified wealth management professional, backed by a team of analysts who are constantly scouring the market in search of the best investing instruments and solutions – including everything from trusts to exchange-traded funds, fixed income securities, and equities.
Having a say over your investment portfolio is the most compelling reason for choosing the advisory style of asset management. You will always be in the driver’s seat and will have total control over where your money is being invested at any given time. This is particularly helpful when markets are volatile – and you need to be able to react quickly to these swings.
Having to cede control of your portfolio to the wealth manager might not be something that everyone is comfortable with.
Also, the higher cost and fees associated with discretionary fund management can be a deterrent, with the value-add offered by the service visible only over time. This is especially the case when wealth management companies outsource the investment management to other companies.
How well do you know your investment tools? A highly labour-intensive style of wealth management, advisory portfolio management requires you to be very knowledgeable about investing tools and techniques and highly attuned to market movements.
Because you are required to “sign-off” on every deal, you need to remain contactable at all times to approve of any changes made to an order. If your wealth manager is unable to reach you at a particularly crucial moment, it might result in a missed opportunity for a financial gain or even a loss.
Are you the type that prefers to be in control of your assets? Do you have the time and the knowledge to manage your investment portfolio? Or are you comfortable just letting others run the show for you? The answers to these questions will guide you in understanding if your preference is for discretionary or advisory investment management.
Regardless of which approach you choose, it is always important that you know what you are getting yourself into. Be clear about the costs of each approach, weigh up the pros and cons, and understand who you are as an investor – your preferences, goals, and risk tolerance – before signing on that dotted line.