Perspective

Do you know what you are paying for?


The investment management world has never been short of jargon, and I know that by including jargon in my sub-heading I am taking the risk that many of you may have stopped reading my article already!

I speak to lots of charities and schools and often find that they aren’t sure exactly what level of service they are getting from their investment manager. I thought it would therefore be useful to look at the three main levels of service and explore the differences between them.

Investment Advice

Before going into detail on the different kinds of investment management service, a key issue to consider is whether or not you receive ongoing investment advice. Why is this so important? 

Some of you will be aware of the Charity Commission’s guidance Charities and investment matters: a guide for trustees (CC14) which is recommended reading and clearly states that:

“In order to act within the law, trustees must take advice from someone experienced in investment matters unless they have good reason for not doing so.”

The most common options for trustees are:

  • To delegate this to a regulated investment manager or adviser (typically working under a Discretionary or Advisory agreement)
  • Rely on the financial experience and ability of the trustees (for instance, I am personally involved with a seafaring charity - although we still insist on a discretionary agreement with our investment manager)

Discretionary Management

Discretionary management is when an investment firm builds and manages a portfolio of investments on your behalf. They take into account how much you have to invest, the level of risk you are prepared to take, your financial objectives, time horizon, drawdown requirement and ethical criteria.

Once the portfolio has been built, the manager will make ongoing decisions about the portfolio using their own discretion (within agreed parameters). It is incumbent upon the firm you select to ensure the suitability of every investment decision and indeed the overall suitability of your portfolio. It is therefore an iterative and ongoing service.

Do not assume that because you are invested in a Charity Authorised Investment Fund or Common Investment Fund that this is under a discretionary management agreement and that you are getting advice. This is a common misconception and a question to ask your manager. Some managers offer an advice “umbrella” and some offer an execution-only agreement (more on that later).

Advisory Management

Advisory management follows the same process as discretionary management. However, the investment firm has to contact the client and obtain agreement before any changes are made to the portfolio. The firm is unable to make changes to a client’s portfolio without this agreement.

As with discretionary management, it is still incumbent upon the manager to ensure the suitability of every investment decision and indeed the ongoing suitability of the portfolio. This is also an iterative and ongoing service.

Execution-Only

Execution-only is when a firm undertakes transactions for a client according to the client’s instruction. The firm does not give advice on the merits of the transaction and in relation to which the rules on assessment of appropriateness (otherwise known as suitability) apply. You therefore might expect to pay less for this service than a discretionary or advisory service.

I attach an anonymised extract from a large charity manager’s application form for a multi-asset charity fund. This extract makes it clear that the manager is not providing discretionary management or any form of investment advice. In fact, they direct the client elsewhere for advice. This is something that trustees and governors should be aware of.

‘We understand that in the provision of this service, ABCD are executing the transaction on an execution-only basis and are not providing advice on the merits of the transaction and in relation to which the rules on assessment of appropriateness and suitability do not apply. Consequently, investors do not benefit from the protection of riles on assessing appropriateness and suitability provided within the Regulatory Rules.

You should consult an intermediary if you require investment advice.’

I have tried to keep my article short but hopefully that gives you an idea of what you are getting from your manager, and what you are paying for.

If you have any questions then please contact me on james.brennan@cazenovecapital.com

 

For information purposes only. Nothing in this article should be deemed to constitute the provision of financial, investment or other professional advice in any way.

 

 

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