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#20 Investment advice and wealth management: what's the difference?

26.03.2024
Felix Niederer

Investors today have several options when it comes to investing their money. They can either manage their investments themselves. Or, if you don't want to manage your portfolio, you can choose between investment advice and wealth management. One is good for you, the other is good for the bank or investment advisor.

Trading account

If you have a lot of time and the knowledge, you can manage your portfolio yourself in a so-called trading account. Anyone with a trading account decides everything independently, from the selection of investment instruments to each individual transaction, without external advice. The trader simply gives the account-holding bank instructions on when, what, how and on which stock exchange to trade, and the bank executes. In jargon, banks call this «execution-only» or «brokerage account». The bank earns from the brokerage fees on your transactions and the custody account fee on the securities in your custody account. When trading in foreign currencies, the bank also earns from a mark-up on the interbank exchange rate. When buying investment funds, front-end loads and redemption commissions are often also applied, and the fund manager also earns money from the fund.

If you know what you are doing and are willing and able to devote a lot of time to it, you should consider managing your assets yourself.

A comparison of investment advice and wealth management

However, you may be one of those who do not want to manage their assets themselves. In this case, banks offer you the choice between investment advice and asset management. There is a significant difference between these two products, which is important to understand.

Investment advice

Investment advice is not what you might think it is. When you receive investment advice, your bank makes suggestions for transactions, for example to buy a particular share, fund or structured product. Or you make a proposal for a transaction and the bank gives you its opinion. However, you are responsible for every decision, every purchase, including any bad purchases. Although the bank must check whether a particular investment instrument is fundamentally suitable for you and provide appropriate risk information, it has no fiduciary duty towards you. This means that it can put your interests above its own, as you decide for yourself which transactions are to be carried out.

You usually pay an annual advisory fee for this service. The bank also earns from the brokerage fee, foreign currency mark-ups and investment instruments. For example, if you are sold the bank's own investment funds or those for which it receives a sales commission. Depending on the case, this means that you pay your bank to sell you products that are lucrative for the bank, but not necessarily for you. The bank also has an interest in carrying out as many transactions as possible because this increases its income from brokerage fees and foreign currency surcharges.

Wealth management

Wealth management, on the other hand, is suitable for those who do not have much time or inclination to take care of the details of their investments. With a wealth management mandate, you delegate the management of part of your assets to a bank, an asset manager or an online asset management platform. With the mandate, you give the agent power of attorney to buy securities with your money and thus manage your investment portfolio. The wealth manager or wealth management platform has a fiduciary duty to put your interests before their own. This does not mean that your personal interests and preferences cannot be taken into account, on the contrary. To begin with, the wealth manager or platform analyzes your personal financial situation and evaluates your risk capacity, your risk appetite and, of course, your investment goals. This assessment is then used to create your personal risk profile, which forms the basis for creating your investment strategy. A good investment strategy is key, as it defines the proportions of the various asset classes in your portfolio. A good wealth manager will also take your personal preferences into account in this step. On a good online wealth management platform, this is now possible with very little time expenditure.

The advantage of asset management is that you don't have to worry about the details of your investments, which saves you a lot of time.

Were you already aware of the difference between investment advice and wealth management? I hope this article has helped you to better understand the advantages and disadvantages of these two options. If you have any questions or would like to share your thoughts, feel free to leave a comment or email me. See you next time!

Disclaimer: We have taken great care with the content of this article. Nevertheless, we cannot exclude the possibility of errors. The validity of the content is limited to the time of publication.

About the author

author
Felix Niederer

Founder and CEO of True Wealth. After graduating from the Swiss Federal Institute of Technology (ETH) as a physicist, Felix first spent several years in Swiss industry and then four years with a major reinsurance company in portfolio management and risk modeling.

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