The investment services industry can be daunting and ambiguous for individuals who seek a return on their capital. After working hard to earn your wealth, it is important to understand professionals’ different services 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 regulated 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 specialize in any investment niche they wish, for example:
FTSE All-Share stocks,
Combinations of the above
Straight derivative trading (CFDs, Futures & Options)
The main reason why investors choose stockbrokers over any other professional investment service is down to control. Due to a brokerage firm’s nature, they can only execute a trade after you instruct them to do so. This means a brokerage can’t keep buying and selling securities without you knowing – known as churning for commission. However, this doesn’t prevent stockbrokers from providing you with several new ideas a week and switching your positions to a new idea, Sky Birds.
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However, there are natural flaws with the brokerage industry is that because trading ideas can only be executed after being instructed to list a few flaws;-
you may miss out on 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 on gaining authorization from their clients. So if you are ultra-busy or travel a lot, 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 from brokerages. The core aspect of these services is that 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 onboarding 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-winded process at all. Once you agree to the services offered, you will only be updated on the on-going account data and portfolio reporting promptly. 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 your appetite for risk. These portfolios will focus on specific securities, economies, risk, and investing type (income, capital growth, or balanced). All of this would be discussed before or during the application process.
Another method used by investment management firms is different strategies implemented by their portfolio managers. These strategies are systematic and go through a thorough analysis before investment decisions are made.
The fees usually associated with investment management firms can vary from each firm. There are three common types of fees and are usually combined; fees can be;-
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 associated 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 benefit provided by 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. It is also the investment management firm’s job to adhere to the investment mandate you agreed on, we’ll take about this later, so you understand the time frame given what you should expect. Another bonus why high-net-worth individuals choose investment management services is because they are not hassled by phone calls every other day with a new investment idea.