There Are Three Levels of Investment Management: Which One is Right for You? 

There Are Three Levels of Investment Management: Which One is Right for You? 

There Are Three Levels of Investment Management: Which One is Right for You? 

If you’ve been diligent, fortunate, or simply good at managing your finances, chances are you’ve accumulated a tidy sum over the years. Whether it’s through hard work, a healthy income, or a stroke of luck, a surplus of funds can present you with a wealth of opportunities. But what do you do when you find yourself with more money than you currently need? This fortunate position is where the real investment decisions begin to surface. You’ll have multiple choices to ponder:

  • Which custodian should you choose to hold the money?
  • Which types of investments should you utilize (mutual funds, ETFs, individual stocks and bonds, CDs, etc.)?
  • If you’re using a retirement account, which type is best (Roth IRA, 401k, etc.)?
  • How much risk should you take?
  • What should your target rate of return be (driven by #4)?

This list is far from exhaustive, and the answers only get you started. They don’t solve for future decisions like when to rebalance, how to monitor and evaluate fund managers (if you have any), or how and where to make contributions or withdrawals in a way that minimizes transaction costs and taxes.

When it comes to choosing an investment platform, you can get a lot of help, a little help, or virtually no help. Take a look at the following summary of each of the three options investors can choose from along with examples of each. I’ve also suggested the type of investor who may be best suited for each level of management, and some pros and cons to consider.

Full-Service

A full-service investment manager typically offers the highest level of investment advice. Typically, they’ll have full discretion to make changes to your portfolio to achieve your agreed-upon objectives within a stated risk-tolerance. A full-service firm will offer a dedicated lead advisor who should be expected to not only develop a very personal relationship with you, but to obtain a full understanding of your goals, time-horizon, and feelings around what this money will mean to you over time.

Today, many investment managers are part of a larger firm that also offers financial planning or “wealth management” to clients. One advantage of this approach is that an advisor should be better equipped to connect the investment strategy with overall retirement, income, tax, estate, or gifting strategies. This should ensure that things like risk level and liquidity needs are aligned.

Today, most firms charge a fee linked to the amount of assets under management. It’s become common for advisors to offer services like retirement, cash flow, education, tax, and other financial planning without any additional cost for those with substantial assets. However, many firms also charge an additional and separate fee for financial planning.

While accessibility will vary from firm to firm, with a full-service approach, you should expect easy access to your personal advisor for any concerns, family emergencies, financial changes, or for answers to any questions that come up. Many find this comforting, or even necessary from the person they entrust their savings to.

Examples:*

In Kansas City:

Legacy Financial Strategies
Stepp & Rothwell
FAS Wealth Partners
Aspyre Wealth Partners
Retirement Planning Group

Nationally:

Edelman Financial Engines
Creative Planning
Mercer Advisors
Hightower

Who it makes sense for:

Busy professionals or families/business owners
Those looking for a more personal relationship
Those looking for continuity for their beneficiaries
Those willing to pay for advice
Those who feel reassured by having a personal partner on top of their finances and plan when they are short on time to do the research

Pros/Cons

Pros:
Personal touch
Easy access to an advisor
Long-term relationship
Typically, the highest-paid advisors/planners are the most knowledgeable, experienced, and capable – but no guarantees (always check Broker Check)
It’s common for these advisors to be limited to a maximum number of families so you’ll feel more of a personal connection.

Cons:
Requires engagement (most firms won’t tolerate years of ex-communication, so you’ll need to engage to a certain extent)
Highest costs (expect to pay .5% to 2% per year depending on the size of your account and the level of services needed)
Most firms require a minimum fee of $2,500 to $10,000 per year and/or a minimum account size.

Questions to ask to find the right fit:

Are there minimums?
How do they charge?
Are they independent/fee only/fee based/fees+commission/act as fiduciary?
How many advisors/clients per advisor?
Firm personnel: age, expertise, personality?

Discounted

For the fee-conscious, and those who may want to handle most or at least a portion of their money management personally, but prefer a professional opinion now and then, there are discounted options.

You’ll be expected to open the account (or accounts) yourself online before gaining access to a financial consultant who may or may not be local, but will usually engage online or over the phone. This person will likely not be your only contact, as discounted firms are very large and turnover is fairly high. This would be problematic if you expected your advisor to remember your parents’ illness or your child’s college aspirations from your last conversation. But if you just need help researching a ticker symbol or getting your hands on a research report on emerging markets, this can work well.

Some companies may have several levels of engagement ranging from access to human advisors or even financial planning reports or analysis from CERTIFIED FINANCIAL PLANNER™ professionals all the way to “bots” you can chat with to get some answers.

Most discounted firms will provide do-it-yourself technology on their website to allow you to work through your own analysis. This takes the pressure off the human workforce (which allows them to discount their fees in the first place).

Examples:

Vanguard
Facet Wealth
SoFi
Ally
Schwab (note for our clients – Schwab has both a retail and institutional offering for use through independent advisors – Legacy uses this offering).
Fidelity

Who it makes sense for:

Tech-savvy investors
Those with straight-forward situations
“Do-it-yourselfers” with some hand-holding still needed

Pros/Cons

Pros:
Cheaper than full service, (nearly free to .5% annually)
Trading platforms give you the ability to place your own trades on an app

Cons:
Typically, you’ll be one of a high number of customers
May lack personal touch
Costs may or may not include revenue sharing (hidden fee) which can impact impartiality of advice

Questions to ask to find the right fit:

How long have you been in business?
Are there minimums?
Will I engage online/over the phone/any in-person options near me?
How am I charged?
Are there revenue sharing arrangements that add cost to my advisory fee that I may not see?

DIY

If your goal is to handle the investment management process completely on your own without any cost or advice from a third party, there are plenty of options. Here is what the “do-it-yourself” path looks like:

You’ll still need a reputable custodian to hold the assets and to execute the trades on a public exchange. Many of the companies listed above in the discounted level can be used in this manner without paying anything for advice. Schwab, for example, offers you the option to simply open a brokerage account, deposit funds, and execute an investing and trading strategy on your own. Trading costs are virtually zero on their platform (they’ve been the leader in what’s known as “the race to zero” in trading costs) and competitors like Fidelity have followed suit. TD Ameritrade, the last of the big three discount custodians offering a retail option was recently acquired by Schwab.

Several reputable custodians who have not achieved household name-status still offer robust platforms depending on your needs:

For sophisticated investors or traders:

Interactive Brokers (most appropriate for very large accounts)
TradeStation Select

For beginners/amateurs:

Robinhood
Plynk

Who it makes sense for:

Those with a professional background in investing
Those with the time to dedicate to educating themselves on every aspect of investing, or even obtaining securities licenses or designations

If investing terms like UBTI, P/E ratio, duration, yield curve, alpha, beta, R squared, and derivative don’t sound familiar to you, then at the very least, you’ll want to start with a discount investment platform that can provide the guidance professional investors won’t need.

Pros/Cons

Pros:
Very low cost, although some platforms like Interactive Brokers may charge trading commissions.
Very sophisticated trading tools may be available on certain platforms for those who know how to use them.
Apps like Robinhood are very slick and easy to use on a smartphone (some might say too easy, so be careful not to fall for the “gaming” aspect of investing pushed by some providers).

Cons:
Tools tend to be highly sophisticated or very basic (if using app-based services) with little in-between.

Questions to ask to find the right fit:

Will I be charged trading commissions?
Can I negotiate the rate (for ultra-high net worth investors)?
Are there “tiers” of access based on paying additional fees?
What support is offered if I have a problem – if any?
Is your platform built more for investors or “traders”/amateurs or professionals?

Understanding where you stand in terms of your technical needs and capabilities is the best way to ensure the right fit when looking at the three service levels of investment management. Technology has leveled the playing field in many ways for the individual investor. Just be sure you think about what your needs and objectives are before you sign on with a new platform or custodian, and you’ll be more likely to enjoy a successful investing experience.

Before agreeing to work with any investment professional, ALWAYS look at their publicly available regulatory record at Broker Check.

*Registered Investment Advisors and Broker Dealers mentioned in this post are referenced for illustrative purposes only and should not be considered recommendations or advice.

Mike Wren

Mike Wren

Mike Wren, CFP®, CDFA® is the CEO, Managing Principal and Financial Advisor at Legacy Financial Strategies. As Legacy’s managing principal, he draws on over 23 years of experience in financial planning.