Your Investment Options
A guide to choosing the approach that works for you...
Your financial planner will recommend an investment portfolio that suits your individual circumstances, your long-term financial goals and your attitude towards investment risk. But you also get a say in how you want those investments to be managed, and it is important to understand the different options available. To work out the right approach for you, you should consider two important questions.
1. Who do you want to make your investment decisions?
If you would prefer to stay directly involved in the management of your investment portfolio, then advisory management might be right for you. After your investment portfolio has been assembled, any subsequent changes (such as switching out of an underperforming fund or reacting to changing market conditions), must be approved by you first. However, this can take time, and you could miss out if important decisions are not taken quickly.
On the other hand, you could opt for discretionary management. This means that after your investment portfolio has been created, your investment manager has permission to make changes on your behalf, speeding up the investment management process.
2. How personalised do you want your investment portfolio to be?
With model portfolios, your financial planner will recommend a ‘ready made’ portfolio. It will have a specific risk rating that closely matches your own attitude towards risk. You will be joined in this portfolio by other investors who have similar objectives to you. This keeps costs down, but means your individual preferences and personal tax liabilities (like capital gains tax) aren't taken into consideration.
In contrast, a bespoke portfolio will be tailored specifically to your requirements. As is often the case with a highly-personalised service, it typically comes at a significantly higher cost. However, as you would be the only investor, it should make it easier to manage any tax issues associated with your investments.
Which option is right for you?
The table below sets out the different types of investment management options available, and how your personal preferences could help guide your decision. Your financial planner can explain the pros and cons of each, and help you choose the approach that best suits your needs.
Glossary of terms
We’ve included a brief outline of some of the terms used in this document. Your financial planner will be happy to provide you with further detail and explain how these terms will apply to your investments.
Advisory management: an investment portfolio where the investment manager must ask for your consent before making any changes to the investments held within the portfolio or the overall investment strategy. They will not be able to make any changes until they receive your permission.
Asset allocation: when assembling an investment portfolio, investment managers can choose to diversify the investments across different asset classes, and determine what percentage of the portfolio to allocate to each. This is called asset allocation.
Bespoke portfolio: a portfolio created and managed specifically to suit your individual requirements. Bespoke portfolios are often managed to consider the tax implications of any investment decisions – such as triggering a capital gains tax liability.
Capital gains tax: depending on the tax wrapper and your personal circumstances, you may be required to pay capital gains tax (CGT) if you make a profit when your investments or other assets are sold. With a bespoke portfolio, your investment manager may make tax-efficient decisions based on your known tax liabilities that make use of your CGT allowance.
Discretionary management: an investment portfolio where the investment manager has obtained prior consent to make any changes to your investment portfolio that they consider necessary. While the decisions taken will be made ‘at the discretion’ of the investment manager, they will always be in line with the investment mandate, objectives and risk profile agreed with you in advance.
Fund: a collection of individual holdings, packaged by an investment manager.
Investment portfolio: the name given to the collection of investments managed on your behalf by an investment manager.
Model portfolios: a portfolio constructed to operate at a predefined level of risk. A model portfolio will be owned by a pool of investors seeking a similar level of return.
Rebalancing: as the value of different investments changes over time, this can alter the weighting of the portfolio to different types of assets. Portfolio rebalancing is the process of readjusting the portfolio and returning it to its original or preferred asset allocation. This makes sure the portfolio remains true to the investor’s risk preferences and investment objectives.
Risk: broadly speaking, risk is a term used to describe the uncertainty of an investment achieving its desired outcome, or even the possibility of losing some or all of an investment. There are different types of risk associated with investing, and all investments carry an element of risk, although some come with a higher risk than others.