What to Consider When Choosing an Investment Management Approach

Chris Merrifield

Wealth Advisor
First Republic Investment Management

December 7, 2017

As an investor, you have an important decision to make: How should you manage your investments? Do you have the expertise and time to manage them yourself, or do you want advice and need professional guidance? Investment management comes in a variety of options. Finding the right service to meet your needs begins with outlining your financial goals and objectives and having a good understanding of your priorities. You might start by asking yourself the following questions to help determine your investment management needs:

  1. Am I looking for portfolio customization and a specialized level of service?
  2. Am I willing to pay fees in order to receive a certain level of service?
  3. How involved do I want to be in managing my investments?
  4. Are accessibility and easy-to-use technology a top priority?

Answering these questions might take some self-investigation or perhaps even the initial advice of a financial advisor, but the process will better enable you to choose the best option for your needs. Here’s a look at the three main investment management options and some considerations for each:

1. Self-management. This “do-it-yourself” approach to investing offers the most control. This is how it typically works: You set up an online brokerage account and then use your own guidance to buy and sell investments. Most online brokers provide basic market research and portfolio analysis tools, but not personalized investment advice or services beyond basic customer care. You do all your own research and investment management — including periodically rebalancing your portfolio, designing an asset mix that meets your objectives, and determining when to buy or sell particular investments.

While self-management might be the right choice for someone who wants to be in the driver’s seat, it can be time-consuming depending on your investment needs and objectives. From a cost perspective, on the other hand, self-directing your assets can be the most affordable way to invest. While self-management avoids investment advisory fees, an investor would still want to be mindful of account trading fees, commissions, fund expense ratios and any account maintenance fees. It is also worth noting that the cost of your time spent maintaining your portfolio should be evaluated when considering if this option is right for you.

2. Professional investment management services. If you want in-depth and personalized investment guidance, having a professional advisor may be the best choice. An experienced advisor can not only manage your investments fine-tuned towards your financial goals, but they can also provide for a customized level of service to fit your relationship needs — meeting as often as you would like by phone or in person. Professionals can also develop and implement comprehensive financial plans, essentially being your overall financial wellness advisor. They can coordinate with your other advisors — including tax professionals or estate attorneys — to help align your financial strategies through a team approach.

There’s a wide spectrum of professional advisor relationships. Some investors want an advisor who completely manages their investments on their behalf while providing regular updates on performance and being proactive about reaching out to them. Others want to be the “copilot,” relying on their advisor for expert guidance while still being involved with tactical decisions and driving the relationship.

Having a professional advisor tends to be the most expensive option, as typical annual investment advisory fees hover around 1 percent of assets under management. However, it can make sense if your needs are beyond the time you can or are willing to spend on managing your assets. You might also want to consider full-service investment management if you are seeking specialization and expertise, or you have a complex financial situation and need individualized guidance. Although the investment advisor fee can be an unattractive factor, investors might be able to benefit from having access to relationship pricing between their advisors and custodians, as savings are passed along to clients. Lastly, having a professional investment advisor might be necessary for an investor seeking access to non-standard investments, such as hedge funds or other alternative vehicles with special suitability requirements.

3. Digital investment advisory service. This relatively newer option can be thought of as a hybrid of the two preceding options. It is fully discretionary management, meaning your portfolio is constructed and maintained on your behalf, like a traditional professional investment management service. However, the client experience and overall approach are different. This option is client driven, relying on the investor to work through the digitally focused platform to relay information about their needs and goals. Typically speaking, portfolios created by this option are less customized than traditional investment management services, but they are tailored to the investor's specific risk tolerance and time horizon. Digital advisors also rely upon technology, generally referred to a portfolio management “algorithm,” which allows advisors to monitor portfolios daily and employ investment management techniques, such as rebalancing and tax loss harvesting, in an efficient manner. The scalability of this service and the use of technology generally translates to lower investment management fees and a lower point of entry — making this a viable option for investors who are just starting out, fee-conscious or seeking a high-tech, low-touch experience.

Revisiting the goals-based approach

Once you’ve decided which investment management option is right for you, it’s important to keep sight of your priorities and to continually review your investment goals and objectives. As your life changes over time, you might find that your needs do as well. The option that is most appropriate for you now, might not fit your needs down the road. As the investment management landscape evolves, it’s important to stay open to different approaches to ensure that the option you’ve chosen to employ continues to be the right one for you.

Keep in mind that some investors use multiple types of investment management options in building and maintaining their overall portfolio. For example, an investor might have a portfolio of favorite stocks that they house at an online brokerage to self-manage, while also engaging with a professional advisor to manage the bulk of their diversified assets. Any combination of services might be right for your needs, but keeping goals and priorities at the forefront are imperative to creating the most effective overall financial strategy.

First Republic provides its clients with all three types of investment management options. An advisor can help you define your goals and, in turn, determine which type of investment management option makes sense for your personal situation.

The strategies mentioned in this article may often have tax and legal consequences; therefore, it is important to bear in mind that First Republic does not provide tax or legal advice. Investors' tax and legal affairs are their own responsibility and readers should consult their own attorneys or other tax advisors in order to understand the tax and legal consequences of any strategies mentioned in this document.

This article is presented as is.