Small Business Financial Article
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

The Best Ways for Business Owners to Invest

The Best Ways for Business Owners to Invest

In the realm of investment advisory services, investors can generally choose between different services – discretionary, advisory, and execution-only. The primary difference between the three is the actual level of participation an investor will have in the management of their investments. Said another way, it determines the amount of control an investor is willing to give their investment manager in making investment decisions. Discretionary investment management stands at one end of the spectrum as the least hands-on, while execution-only investment management is the other end as the most hands-on. Here are how the three types of investment management services work and why you might choose one over the other.

Discretionary Investment Management

If you don’t feel you have the necessary knowledge or you lack the time or inclination to spend much time in managing your investments, you could give a portfolio manager discretionary authority to manage them on your behalf. At the beginning of the relationship, you sign a consent form confirming discretionary authority.

The advantage of discretionary investment management is it frees you from the day-to-day investment management decisions. You and your portfolio manager will review your portfolio performance at least annually or more frequently if you prefer. Working with a discretionary manager, you can benefit from quick actions of sudden opportunities. Because discretionary managers tend to make bulk trades for all of their accounts, you can also benefit from lower trade costs.

Of course, it does require that you have complete trust in your portfolio manager. You must be confident in his understanding of your requirements and his ability to manage your money in the same way you would if you had the same level of expertise. That requires an extensive due diligence process for identifying, interviewing, and selecting a person you would want to work with for the rest of your life.

Some discretionary investment managers will work with a portfolio as low as $250,000, but most limit their services to larger accounts of $500,000 or more. Discretionary investment managers typically charge a percentage fee based on assets under management (AUM). The fee can range from 1% to 2%, depending on the amount of AUM.

Advisory Investment Management

If you want to be more involved in your portfolio management, you could choose an advisory investment management relationship. Working with your advisor, you would develop your investment strategy. As investment decisions arise –from the initial construction of your portfolio to the day-to-day decisions – your advisor makes a recommendation, but you will have the final word. Although this type of advisory relationship offers you more control of the process, it can result in missed opportunities if you are too slow in responding to a recommendation.

Execution-Only Investment Management Services

If you are a highly informed investor with the desire to control all aspects of managing your investments, you could establish an execution-only relationship with an advisor. As the name implies, your advisor or broker only executes trades based on your instructions. In most cases, the advisory firm will provide you access to research and market insights, but you will have to arrive at any investment decisions on your own. If you opt for this type of service, you should be very confident in your ability to develop an investment strategy because you are not likely to receive any advice from the firm.

In determining which level of service would be best for you, you need to consider the level of involvement you want in the investment management process. For busy business owners, the discretionary account is often preferable. However, many business owners maintain multiple investment accounts with varying levels of service. You might have the bulk of your assets managed in a discretionary account while managing a small portion on your own in an execution-only account.

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