As with any profession, wealth management has its own jargon for clients to get a handle on. Understanding these key terms will help to empower investors, wherever they are on their wealth journey.
Advisory Investment Management is a popular choice and it is what most of the affluent individuals who come to findaWEALTHMANAGER.com are looking for.
Some individuals wish to retain a higher degree of control over the day-to-day management of their portfolio than they would get from a discretionary investment management relationship. Equally, some clients are already skilled investors who want their adviser to act more as a sounding board for their investment ideas than the one actually making decisions.
In an advisory investment management relationship, your adviser with get to know your situation and financial goals in a good deal of depth – just as a discretionary investment manager also would – so that they can offer investment advice which is tailored for your needs. They will offer then offer you investment advice on an ongoing basis, which could pertain to broad asset allocation decisions or individual stock selection; they will also offer very wide-ranging recommendations for how your portfolio should be positioned and then rebalanced over time as your circumstances evolve. However, you will ultimately be responsible for the investment decisions made and you must ensure you are comfortable with this.
A broad range of clients prefer an advisory investment management relationship. Some are sophisticated investors, perhaps with a finance career behind them, who really want their adviser to provide a second opinion and to bring to bear the objectivity and experience of a professional investment manager. Other clients have limited knowledge of investments, but want to learn to run their own portfolio with a professional on hand to help every step of the way.
You should be aware, however, that wealth managers typically ask for larger initial investments to start an advisory investment management relationship. This is because providing advisory services requires far more resources than one where there can be more standardisation across the client base. In an advisory relationship the adviser has to have investment expertise which is both very broad and deep in order to be able to give guidance on all the asset classes, markets and type of investment product the client may be interested in. Furthermore, because the value of your portfolio is likely to fluctuate far more than if it were managed on a discretionary basis, advisory relationships represent less stable revenue streams for the institution. For these reasons, advisory investment management services typically call for a £1m initial investment.
As you would expect, an advisory investment management relationship is also more time intensive as it requires far more interaction between client and adviser than a discretionary one. At times you might be taking an investment strategy or stock pick to your adviser to get a second opinion. At other times your adviser may be calling you to ask if you have considered a certain kind of investment. This more collaborative kind of arrangement is just what some clients are looking for, but for others it may represent a higher level of commitment than is feasible on an ongoing basis.
A discretionary investment management relationship should not imply that the client is not in control of their investments; they certainly are, it is just that the investment management process is far less hands-on and demanding of their time and thoughts. In a discretionary wealth management relationship you will have in-depth discussions with your adviser so that they are intimately acquainted with your entire financial situation and know all your financial objectives. Together, you will then devise an investment strategy designed to help you achieve your short, medium and long-term goals. You set the parameters for how your portfolio should be run: the level of risk you are willing to take on; the level of returns you hope to achieve and in which timeframe; and the types of investment you do or do not wish to hold. The adviser then takes on the day-to-day management of your investments, reporting back to you regularly on their performance and any significant decisions which have been made.
If you are unsure whether a discretionary or advisory investment management relationship appeals most, you should remember that wealth managers are used to clients switching between different service packages and that this is something they often do for various practical and psychological reasons. It is frequently the case that a client commences an advisory investment management relationship with an institution and enjoys collaborating with their adviser on running their portfolio for a period before eventually ceding more control. Investors often have less time than they think to dedicate to managing their investments; transitioning to a discretionary investment management relationship can also be a natural progression as trust between the client and adviser is cemented over time.
This may be a well-worn path, but things often go the other way too. Some clients start their wealth management journey in a discretionary investment management relationship and then move to an advisory one for all or some of their assets, because their level of interest and expertise have increased. Your potential wealth management partners will be able to explain all the services they offer, and what their clients typically choose, in the early stages of getting to know you.
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