Asset Manager vs Financial Advisor
The financial services industry is complex with a multitude of specific sectors, focus areas and often, these sectors overlap. When it comes to protecting or growing your wealth, there are many avenues available in order to achieve your financial goals. A range of professionals may aid your progress; however, these professionals fall across diverse guilds which focus on different aspects of a financial goal. Which brings us to the blurred line which separates professionals in this industry, and confusion for consumers who are not sure what their professionals are doing for them to improve their financial standing. Their inherent duties and limitations of these duties bring forward an ambiguous outlook of what they can do for your wellbeing and wealth. Therefore, with the long-awaited, and often sorely needed Treating Customers Fairly (TCF) principles being implemented into training and legislation for all financial service professionals, it is paramount to clarify these lines and understand the differences in service offerings.
An asset manager's function is expressed logically in its title. They manage assets, or in more industry-specific words, they perform asset allocation and fund management from a discretionary mandate actively or passively. An asset manager plays a pivotal role in investing funds according to a client’s risk appetite to achieve a maximum return on investment. Asset managers utilise several tools to ensure that there is an appropriate risk to reward percentage, subject to the client’s risk appetite, and benchmarking against other funds to determine a comparison of performance and growth. They are generally not client facing and are geared towards institutions and high-net individuals. The asset manager will have a variety of funds under their control consisting of various strategies and risk appetites. For this service, they are generally paid based on the percentage of the assets (your investment) under management (their management) and outperformance bonuses compared to benchmarked funds.
A financial advisor’s function is much broader than that of the asset manager and can often overlap with that of the asset manager, creating a grey area. Their title is again a dead giveaway.They advise their clients on multiple financial areas, such as education and estate planning, tax planning, insurance, retirement annuities, tax-free savings and many more. The financial advisor assesses the client's financial situation and then advises the client accordingly in order to maintain or advance their wealth for the foreseeable future. Such can be through a discretionary or non-discretionary basis giving the financial advisor full control over the funds or only acting as an intermediary between the investor and the implementation of the financial decision. The assessment mentioned above then leads to the allocation of the client’s funds into various risk structures managed by the asset manager. Financial advisors are either paid asa fixed percentage of investment made or through a fixed or hourly fee.
The major contrast between an asset manager and a financial advisor is displayed by their objective. The asset manager needs to maximise return on investment without overexposing the investor and a financial advisor’s goal is to maximise the utility of one’s wealth while maximising the financial security of their client over their lifespan. The crux of this assessment between the two is truly dependent on the services needed. While an asset manager allocates and actively/passively manages your investment, the financial advisor takes a more expansive outlook on one’s wealth and how to ensure that you get the most out of it and not purely to earn investment returns.
The ability to distinguish the difference between these guilds is quite important in an insurance perspective, as insurers’ claims experience indicate that claims against financial advisors are more frequently, whilst claims against asset managers are more severe, in terms of quantum. As a result, asset managers typically purchase much higher limits of indemnity and first amount payables imposed by insurers are higher than that of financial advisors, due to the frequency and severity aspects. The frequency of financial advisor claims is not exhaustively based on the variety of advice they provide, but a large concern emanates from the contrast of predicted/expected gains to actual gains. The advice provided may paint a dissimilar picture to the actual performance of investments and this may be considered to be negligence. Dependent on the asset manager [and their service offering], the aforementioned risk is still relevant to their operations as a client may seek retribution for negligent handling of funds. The financial adviser's clients may seek retribution for the negligent advice of which investments the insured should pursue.
The operative words of the previous two statements being “handling” and “advice”. The words highlighted above are the premise of the distinguishable line between these two professionals.
The advice aspect of financial advisors is now governed by the principles of TCF which require the advisor to ensure products and services recommended to customers be appropriate for that individual customer [and their financial requirements] and require that the customer is fully informed, in order to follow said advice. Equally as important, is the duty of a financial advisor to give their clients the opportunity of choosing their preferred vehicle from the recommended list of appropriate funds. This is not an easy notion to establish when providing advice to a range of individuals, and an extremely broad range of investment opportunities abound.
Asset managers and financial advisors are not the same professions, however, their aim to help an individual achieve their financial goals is shared. The major discriminatory factor being that asset managers are there to maximise the growth of the funds entrusted to them through active and passive investment, while financial advisors are thereto ensure sustainable growth and financial wellbeing of the individual.
Needless to say, it is of paramount importance that investors understand the role that their financial services professional plays, and that they are suitably qualified, in order to ensure that the individual’s financial goals are suitably met.