The Investment Management services industry can be daunting and ambiguous for individuals who seek a return on their capital. After working hard earning your wealth, it is important to understand the different services offered by professionals and what solutions fit you personally. One of the main questions we get asked here is:
“What is the difference between investment management and stockbrokers?”
Firstly, let’s discuss what stockbrokers are – we all have a much better, clearer, idea of what they do and who they represent. Stockbrokers are regulate firms that offer financial advice to their clients. A stockbroker buys and sells equities and other securities like bonds, CFDs, Futures and Options on behalf of their clients in return for a fee or commission. A brokerage / stockbroker will receive a fee on each transaction, whether the idea is profitable or not.
A brokerage can specialise in any investment niche they wish for example:
- FTSE All-Share stocks,
- AIM stocks,
- European Stocks,
- Asian Stocks,
- US Stocks
- Combinations of the above
- Straight equities,
- Straight derivative trading (CFDs, Futures & Options)
The main reason why investors choose stockbrokers over any other professional investment service is simply down to control. Due to the nature of a brokerage firm, they can only execute a trade after you instruct them to do so. This means it is impossible for a brokerage to keep buying and selling securities without you knowing – known as churning for commission. This doesn’t however prevent stockbrokers providing you with several new ideas a week and switching your positions to a new idea.
However, there are natural flaws with the brokerage industry is that because trading ideas can only execute after being instruct to list a few flaws;-
- you may miss out of good opportunities due to moves in the market,
- you may get in a couple of days later because you were busy and not make any money after fees,
- you may receive a call to close a position but unable to without your say so.
The above are examples that can happen when investing with brokerage firms. But this is due to the reliance of gaining authorization from their clients. So if you are ultra busy or travel a lot then you could potentially miss out on opportunities to buy or sell.
What are investment managers?
Now we understand what stockbrokers / brokerage firms are about, let’s discuss what investment management services can do for individuals.
Investment management firms run differently to brokerages. The core aspect to these services is that the professional investment managers use their discretion to make investment decisions. As a client of an investment management firm you will go through a rigorous client on boarding process (just like a brokerage firm) to understand your investment goals, understanding of the services being used, risk profile, angering to the investment mandate and allowing the service to manage your equity portfolio.
The sign up with the service may seem long winded but it’s in your best interest to ensure the service is suitable and appropriate for you. In reality, it’s not a long wind process at all. Once you agree to the services offer then you will only updated on the on-going account data and portfolio reporting in a timely manner. This means no phone calls to disrupt your day-to-day activities and allows the professionals to focus on your portfolio.
Investment management firms usually have specific portfolios with a track record. Into which you can invest your capital according to you appetite for risk. These portfolios will focus on specific securities, economies, risk and type of investing (income, capital growth or balanced). All of this would discussed prior or during the application process.
Another method used by investment management firms is different strategies implement by their portfolio managers. These strategies are systematic and go through thorough analysis before investment decisions are make.
The fees usually associated with investment management firms can vary from each firm. There are three common types of fees and are usually combine, fees can;-
- Assets Under Management Fee – This is where you pay a percentage of the portfolio per year to the firm, usually an annual fee. E.g) 1% AUM Fee on £1,000,000 is £10,000 per year.
- Transaction Fee – This is a fee associate with each transaction made through your portfolio – similar to the brokerage firm’s commission.
- Percentage of Profits Fee – This is where any closed profits generated over a set time will be charged to the firm. E.g) 10% PoP Fee – the firm generates you closed profit of £10,000 in one quarter – you will be charged £1,000.
The main benefits provided from investment management firms is that after the service understands your needs. And tailors the service around you, it is their job to build a portfolio around you. It is also the job of the investment management firm to adhere to the investment mandate you agreed on. We’ll take about this later, so you understand of the time frame given what you should expect. Another bonus why high-net worth individuals choose investment management services is. Because they are not hassle by phone calls every other day with a new investment idea.