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FEATURE: Please be discreet

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Kate O’Raghallaigh examines the pros and cons of discretionary advice

Are you the kind of investor that takes a DIY approach to your portfolio? Or do you want to reap the benefits of investment while paying someone else to choose your shares for you?

If you research, choose and buy your investments yourself, then good on you. If you do not, then you should be aware that there are varying levels of advice and services you can get from brokers and financial advisers. Execution-only services allow you to choose your own shares and pay for a broker to make the transaction. Even in the case of online brokerages that often provide research and information, the shares or investment product you eventually choose is essentially your own decision, and the broker is not liable for it.

Discretionary advice, on the other hand, means that you hand over all the investment decisions to an adviser, broker or manager, who manages your investment portfolio on your behalf.. “Discretionary management is mainly suited to those with a large portfolio,” says Dale Chantler, associate IFA at Balmoral Associates.

Ashley Clarke, chartered financial planner with online IFA NeedAnAdviser, explains how it works. He says: “In simple terms, you give your agent, IFA or fund manager the authority to make decisions on your behalf.”

Why go for it?

Inexperienced investors who don’t know where to begin might be particularly keen on this kind of service. Although the name sounds like a fancy way of explaining away ‘paying someone to do your dirty work’, Clarke points out that everyone has received discretionary advice at some point – they’re just may not be aware of it. He continues: “Everyone has some sort of discretionary management service. Take your bank account or your pension for example. When you deposit a tenner in your account, you are giving the bank permission to go off and invest it elsewhere, which is exactly what they do. If you have a personal pension, you have already given the provider the power to invest your money in various assets.”

It’s not a matter of simply handing over a wad of cash to an agent or fund manger, then leaving them to it – your manager or adviser should keep in contact and send you reports on how your investments are doing on a regular basis.

Once you have found an adviser to look after your portfolio, he or she will work out what kind of investor you are first. For instance, do you want to take risks or do you want to invest in relatively safe products? “Fund management companies will have fairly established portfolios for low-risk investors, and are permitted to invest based on the profile that you draw up at the beginning of the arrangement,” Clarke says.

If you do not have the time to monitor your investments constantly, you may not know when to sell out of some shares, or buy those that you think will perform well. According to Chantler, a benefit of discretionary advice is that the fund manager or adviser is able to respond instantly to any changes in the market, as it is their job to keep on top of your finances. He says: “A discretionary manager’s approach will change over time and they can adapt their investment portfolios accordingly.”

Value for money?

But what are the costs involved? Investors usually face an additional fee of 1% to 2% on top of the normal management fee (usually between 1% and 3% per year), although this can vary depending on the service provider. “The fees will often reflect the service levels provided, for example, how often you require reports on your portfolio,” Chantler says.

However, those with smaller portfolios should remember that discretionary advice can be unnecessarily expensive, according to Clarke: “Investment is nothing more than educated guesswork. People whose job it is to manage investment portfolios don’t actually know for certain what’s going to happen to the market. If they did, they would probably be millionaires, not working in their current position.”

Putting any amount of money into an investment product, be it stocks and shares, bonds or property, carries an element of risk. Even though arranging a discretionary advice service means that someone else is being paid to invest for you, that doesn’t mean that things can’t go wrong. As Clarke points out above, no one can predict which way the market will go, so if you do seek discretionary advice, remember that it isn’t a full-proof route to investment returns.


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