Discretionary vs. advisory

The choice between taking investment decisions on your own or transferring the responsibility to an investment professional sounds simple? In the opinion of Daniel Obradovic (discretionary, left) and Mischa Anand (advisory, right), there is more to it. In this article the two investment professionals share five aspects to consider before taking the decision.

You have decided that now is the right time to start investing. Maybe you got that important promotion (congratulations!), inherited wealth or simply rate your financial position as stable enough to embark on this journey. The process that succeeds this decision is generally identical:

In a first step, your bank advisor will create a personal investment profile. It evaluates your financial situation, investment objectives as well as prior knowledge and experience. Your investment guidelines reflect your current understanding of financial instruments and the maximum amount of risk you are able to take in order to attain your broader investment goals. Furthermore, an investment strategy is defined. It serves as a guideline for adjusting your investments whenever your portfolio valuation changes.

So far, so good. “So let’s get going,” you say? A major decision, however, still needs to be taken: Should you opt for a discretionary or advisory mandate?

The difference

In an advisory setup, an experienced investment professional, mostly a relationship manager or investment advisor like Mischa Anand, is placed at your side to discuss all investment-related questions. Although you can rely heavily on their support, it is you who takes the final investment decision. If you choose a discretionary mandate, a portfolio manager, for example Daniel Obradovic, is responsible for the every-day management of your portfolio and decides on investment-related issues on your behalf. Both options come with advantages and disadvantages. It depends on your personal circumstances, which model suits you best.

Five considerations

  1. Financial (markets) knowledge: (in)existent?
    Maybe you are an avid reader or even studied finance as a subject at university. No matter where you gained your knowledge from: Are you familiar with asset classes, financial indexes and the dynamics of financial markets? And more importantly: Do these topics interest you? If your answer is yes, then an advisory mandate might be the right choice. Should you have little knowledge in the realm of investing and are less interested in learning more about it, a discretionary mandate may suit you better.
  2. Learning effect: indirect or direct?
    In an advisory setup, you actively participate in the financial markets and immediately see the implications of your investment decisions. Your learning effect is direct. In a discretionary setup, you receive regular portfolio reports or track the decisions your portfolio manager made on your behalf with your e-banking account. As a certain amount of time lies between the financial event and the reporting or next meeting, your learning effect will be indirect.
  3. Time investment: low or high?
    Be honest to yourself:Can you allocate enough time to speak to your investment partner? Are you keen to receive regular advice and discuss your portfolio? If you tend to negate these questions, a discretionary mandate may be the more suitable option.
  4. Reachability: difficult or easy?
    It may sound mundane but is of importance when a sudden event affecting your investments occurs: Are you easily reachable via telephone or email? If you, for instance, are an expat who regularly alternates between continents, time zones and business meetings, it may be hard for your investment advisor to uphold the communication with you. In this case, a discretionary mandate may suit you better.
  5. Regulation: complex or simple?
    Certain countries have inflicted complex regulatory requirements on investment activities. As an example you may have to approve all decisions in writing or adhere to holding periods. If you live in one of these countries, a discretionary solution may help you to fully comply with regulation while simultaneously working towards the achievement of your investment goals.

Despite all the differences between discretionary and advisory, Daniel Obradovic and Mischa Anand share the same opinion: “Don’t rush into something that does not suit your personal circumstances!”

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