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 payment on each transaction, whether the idea is profitable.
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. 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 giving you several new ideas a week and switching your positions to a new view, Sky Birds.
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However, there are natural flaws in the brokerage industry that because trading ideas can only be executed after being instructed to list a few spots;-
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 did not make any money after fees,
You may receive a call to close a position, but you cannot without your say.
The above examples 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 miss 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 undergo a rigorous client onboarding process (just like a brokerage firm) to understand your investment goals, the services being used, risk profile, angering to the investment mandate, and allow 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. In reality, it’s not a long-winded process at all. Once you agree to the services offered, you will only be promptly updated on the ongoing account data and portfolio reporting. 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 particular securities, economies, risk, and investing types (income, capital growth, or balanced). All of this would be discussed before or during the application process.
Another method investment management firms use is different strategies their portfolio managers implement. These strategies are systematic and thoroughly analyzed before investment decisions are made.
The fees usually associated with investment management firms can vary from each firm. There are three common types of costs, and they are typically combined; costs 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 is a fee associated with each transaction made through your portfolio, similar to the brokerage firm’s commission.
Percentage of Profits Fee – Any closed profits generated over a set time will be charged to the firm. E.g.) 10% PoP Fee – the firm develops a fast profit of £10,000 in one quarter – you will be charged £1,000.
The main benefit of 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 talk 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.