Advisory Management: What it is, How it Works

What Is Advisory Management?

The term advisory management refers to the provision of professional, personalized investment guidance. Advisory management services allow private individuals to consult with investment professionals before making changes to their portfolios. Advisory management professionals have expertise in one or more investment areas and provide guidance that is tailored to an individual's specific situation.

Key Takeaways

  • Advisory management is the provision of professional, personalized investment guidance, usually for a fee.
  • Individuals, independent teams, or a group of professionals within a private bank, investment management firm, or specialist advisory boutique can carry out advisory management.
  • Key roles in advisory management include financial advisors, portfolio managers, investment bankers, and investment managers.
  • Advisory management professionals review their clients' personal situations, determine the best asset classes, monitor investment performance, provide guidance, and rebalance portfolios.

Understanding Advisory Management

Advisory management involves the management and planning of investment portfolios, usually for a fee. Individual investors who seek investment advice will seek the services of an advisory manager or an advisory management firm. Individuals, an independent team, or a group of professionals within a private bank, investment management firm, or specialist advisory boutique can carry out advisory management. Key roles in the advisory management field include:

  • Financial advisors: These professionals provide guidance and financial advice including investment management, tax and estate planning.
  • Portfolio managers: This group comprises of one or more people who invest in any number of and manage day-to-day portfolio trading to maximize returns.
  • Investment bankers: These bankers help corporate clients find sources of capital for business deals, and also provide analysis and guidance.
  • Investment advisors: Clients who turn to investment advisors receive highly specialized advice and guidance for investment and financial planning.

Investment advisors who work for advisory management groups meet and work with clients in a number of capacities. They assess a client's time horizon, performance objectives, and risk tolerance to determine which asset classes are the most suitable investments. Advisors are responsible for routine monitoring of investment performance and often execute orders, and also provide guidance in the areas of asset allocation and portfolio rebalancing. Portfolio rebalancing safeguards an investor from undesirable risks and ensures that the portfolio’s exposure remains within the manager's area of expertise.

Asset allocation is the practice of balancing risk and reward within a portfolio according to an individual's goals or an institution’s policy. Managers distribute the portfolio’s funds among three main asset classes: equities, fixed-income, and cash and equivalents, along with alternative investments such as private equity and derivatives.

Because each asset class offers varying levels of risk and return, each behaves differently over time. Investors may use different asset allocations for different objectives. For example, someone who is saving for a year of travel in the near-term might invest their savings in a conservative mix of cash, certificates of deposit (CDs), and short-term bonds. Another individual saving for a down payment on an expensive home—at least a decade away—could diversify into more stocks since they have more time to ride out the market's short-term fluctuations.

Advisory Management vs. Discretionary Investment Management

Advisory management services allow individuals to retain full control over their portfolios and make their own investment decisions. The investment advisor's role is primarily to offer an informed opinion. So, while a wealth manager who offers advisory services consults with their clients and provides advice, it's the client who makes the ultimate buy-and-sell decisions.

In advisory management, it's the client who makes the ultimate buy-and-sell decisions.

Discretionary investment management works in the opposite way. In this discipline, the professional wealth manager takes more control of investment decisions. For the client, the discretionary approach is more hands-off, and is suitable for those who may not have the experience or time to actively manage their own portfolios. Discretionary investment management can only be provided by highly experienced professionals, many of whom have the Chartered Financial Analyst (CFA) designation.

While advisory managers always spend time understanding their clients’ goals and assets, this is often not as thorough a process as with discretionary managers.

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