Your investments: how involved do you want to be?

If you instruct us to manage your investments, there’s one key matter to consider. How hands-on do you wish to be? Some clients like to be closely involved. Others prefer to delegate the day-to-day decisions to us.

At AJB Wealth, we offer both advisory and discretionary services. If you opt for the advisory model, we’ll provide recommendations which will be subject to your approval. Discretionary management is a more proactive service. In this case, we agree your instructions and contractually manage the portfolio in accordance with them.

Either way, we’ll start by exploring your personal circumstances, your goals, your attitude to risk, and your capacity to accept capital loss. This allows us to form a detailed strategy.

In both cases, you’ll benefit from professional advice in the construction of your portfolio. However, there are significant differences in terms of ongoing control, involvement and decision-making processes.

How does advisory management work?

This is the service offered by most IFAs and financial advisers. In this situation, you receive investment recommendations but always make the final decision. Subject to your agreed instructions, we’ll review your portfolio on either a periodic or ad hoc basis. Following such reviews, we’ll make appropriate recommendations for your approval.

What makes discretionary management different?

The discretionary route offers a more dynamic service. We have contractual responsibility for managing your portfolio on an ongoing basis. You delegate authority to us to buy or sell investments in response to changes in the markets or other factors. This means we can make day-to-day decisions without troubling you for approval. Of course, we only operate within the parameters agreed with you, so you remain in overall control.

Advantages of advisory management

• Greater control: As you review all our recommendations, you’re involved in every investment decision. You have the final say at every step.
• Collaborative approach: You’re more engaged in the process. This works well if you have the time and inclination to take a more active role in managing your portfolio.
• Smaller investment pots: This is a practical solution for those at the start of their investment journey or who currently have a modest sum to invest.

Disadvantages of advisory management

• Time commitment: You need to review and approve recommendations, before we implement them.
• Potential delays: The consultation process takes time and so investment changes may not be made at the optimum time. This is especially true for clients who are not easily available to give approval.
• Limited investment choices: Our recommended investment approach will differ from how we manage discretionary portfolios. This is because we won’t have the option to take tactical short-term decisions during periods of market volatility or opportunity. As a result, your exposure to different asset classes and sectors, and types of investment, might be limited. We may also include investments with an element of internal management, which may come with higher charges.
• Funds are not continually monitored:  Changes in an underlying fund’s management may not be picked up until your next review. This risk can be mitigated by instructing us to actively monitor your holdings.

Advantages of discretionary management

• It frees you up: You can sit back and let us do all the work, knowing that we understand your needs and goals.
• A more dynamic investment strategy: Portfolio changes can be made promptly, without the time and paperwork involved in seeking approval. This is particularly important when markets are turbulent. Immediate execution of orders may lessen the impact of falling markets or allow us to take advantage of emerging investment opportunities. In addition to making a longer-term strategic asset allocation, we can also introduce short-term, tactical positions. These will be in response to economic or geopolitical circumstances and to plan for anticipated opportunities or risks. This degree of active management simply isn’t available to advisory portfolios.
• Increased investment choices: As we’re constantly monitoring discretionary portfolios, we can invest in a wider range of asset classes and products. For example, we can implement tactical currency hedging where appropriate.
• Specialist knowledge: Discretionary managers are required to hold specialist investment qualifications and are permitted to offer a wider range of services. Generally, they have greater depth of knowledge and experience.
• Potential for better returns: Active management may result in better longer-term performance, and reduced volatility, though this is not guaranteed, particularly over the shorter-term.

Disadvantages of discretionary management

• Less control: Many clients are happy not to be involved in routine changes to their portfolios, but this hands-off approach may not suit everyone. If you have a keen interest in investment, and time to consider investments on an individual basis, you may prefer the advisory model.
• Not all advisers offer this model: Discretionary investment is often the next step up as you grow your assets, but you may already have a good relationship with a trusted adviser who’s unable to provide this service. Though in some cases, advisers will refer clients to a third-party manager who can.
• Potentially higher charges: On-going charges may be higher.
• Higher minimum investment:  Due to the active nature of such portfolios, most discretionary services require larger sums for investment.

How may fees compare for discretionary and advisory services?

Advisory fees

If you opt for an advisory service, the cost of ongoing advice will depend on how active you wish us to be. This is because we must make recommendations and seek approval for every change to your portfolio. While ongoing advisory fees may be lower than ongoing discretionary fees, this is not always the case — particularly if you require a more active approach.

Discretionary fees

With discretionary management, the service is contractual and is formed of an initial charge and an ongoing management charge. We are obliged to provide you with quarterly valuations and to review your requirements on at least an annual basis. This ensures that your investments are still in line with your situation and your goals.

While the cost of discretionary management has been a barrier to many in the past, we have found that today’s technology allows us to deliver this personalised service at a more affordable cost — without compromising on quality.

Underlying fund fees for both advisory and discretionary

In addition to advice or management fees, there will be an additional fee for the investment platform used to implement the investments. However, such costs may be covered or mitigated by the fund discounts available to professional managers.

Underlying fund costs will depend on the nature of the selected investments. Generally speaking, actively managed funds have higher charges than index trackers or Exchange-Traded Funds (ETFs).  For example, an actively managed fund investing in the US stock market may charge between 0.75 to 1.5 per cent per annum, whereas an ETF may charge as little as 0.03 per cent per annum. While actively-managed funds might potentially outperform a benchmark, they may struggle to cover their additional costs, and may not consistently outperform over the longer term.

Discretionary or advisory: final thoughts 

Choosing between discretionary and advisory services is a highly personal decision, and your choice may depend on several factors. Your general availability, your investment knowledge, and your feelings about delegating control will all play a part. Whatever your situation, we’re here to help you navigate this important choice and we hope that this article is a helpful first step.

AJB Wealth is well placed to help you achieve financial efficiency and security. To arrange an initial consultation, please book a meeting, or call us on 01428 774 070.

Important: The content of this bulletin is for general consideration only, and does not constitute advice. No action must be taken, or refrained from being taken, without advice. This company accepts no responsibility for any loss occasioned as a result of any such action, or inaction. You are also reminded that investments can fall, as well as rise, and, in the event of early encashment, you may receive less back than your original investment.