Asset Management: The Pros and Cons

An asset management service is an arrangement in which you give a bank or other service provider the authority to invest your money on your behalf. In the past, asset management services were primarily available to wealthy individuals. But today, an increasing number of Swiss banks and robo advisors are offering asset management services with low entry requirements, or none at all.

This moneyland.ch guide lists the advantages and disadvantages of using an asset management service to invest, compared to using other investment solutions.

Advantages of asset management services:

• Possible higher returns

Compared to savings accounts, asset management services can potentially yield higher returns over the long term. That is because they enable you to invest in stocks and other assets that can potentially gain substantial value over time. You can use the historical interest and returns calculator to compare the returns of Swiss savings accounts and the Swiss stock market in past years.

• Assistance with choosing a suitable portfolio

When you first subscribe to an asset management service, you must complete a questionnaire in order to determine your risk tolerance and risk capacity. This information is used to put together an investment portfolio that matches your specific needs. Compared to investing on your own using a stockbroker, this screening process can help you find the right balance between stability and potential returns.

• Basic diversification

Asset management services generally use diversified index funds, ETFs, and strategy funds that invest in many different stocks and/or bonds. High-risk investments like buying individual stocks is not normally possible. That is an advantage for new investors, compared to using a stockbroker. It is important to be aware, though, that there are big differences in diversification between asset management services and individual portfolios.

• Minimal time and effort required

An advantage, compared to investing yourself using a stockbroker, is that once the initial setting up is complete, there is no ongoing work involved. The asset management service handles both investing your money, and the ongoing portfolio rebalancing.

You simply transfer the money to the linked investment account, and the asset management service automatically invests it in your portfolio. You can completely automate the process by setting up a recurring transfer at your bank to transfer a predetermined amount of money at regular intervals.

That makes using an asset management service just as simple and effort-free as using a savings account.

• Access to institutional funds

Certain index funds and other investment vehicles are not available to retail investors, so you cannot invest in these funds yourself using a stockbroker. But banks and other institutional investors can invest in these funds. That can be an advantage because some institutional funds may offer cost advantages, such as lower TERs, tax advantages, and lower currency exchange costs. Over the long term, these advantages can translate into higher returns.

• Possible additional services

Many asset management service providers also offer investment advisory services. This may be offered as a separate service, or in combination with asset management. Other services that may be offered in combination with asset management include retirement planning, tax consultation, and real estate consultation, among others. Available services vary broadly between service providers, with conventional universal banks and private banks typically offering more services than robo advisors.

Disadvantages of asset management services:

• Risk of loss

Depending on which assets are included in your portfolio, there is a risk that you could lose money if the value of the assets falls. That is a key difference between investment solutions like asset management and interest-based solutions like savings accounts and medium-term notes. The value of stocks, for example, can rise or fall over time – though the stock market as a whole has grossly surpassed savings accounts in the past when investments were held for long terms. A savings account balance, on the other hand, does not lose its nominal value, and is more suitable if you will need the money in the foreseeable future.

• Asset management fees

You pay an ongoing asset management fee for the service. Typically, you pay an annual fee equal to a percentage of the value of your assets (0.6 percent per year, for example). Additionally, you normally pay the fees for the investment products used (the TERs of funds, for example) on top of the asset management fee. Important: While flat asset management fees are the norm, there are also asset management services that have more complicated fee structures. You can learn more in the guide to asset management costs.

When you invest by yourself with a stockbroker, on the other hand, you pay the stockbroker’s one-time brokerage fees when you buy and when you sell, plus the ongoing custody fees. 

Depending on how much money you invest, using a stockbroker to invest in a broad portfolio (using ETFs, for example) can work out cheaper over long terms. However, it is important to compare the exact costs of both stockbrokers and asset managers based on your specific needs. You can do this using the stockbroker comparison and the asset management comparison on moneyland.ch.

• Minimum capital requirements

Many asset management services require you to invest a certain minimum amount of capital when you first open your account. This minimum required amount can range between several thousand francs and 100,000 francs or even more. However, there are also asset management services that do not have any minimum capital requirements at all.

• Lack of flexibility

With many asset management services, you have little or no control over the makeup of your investment portfolio. The service provider will recommend a specific portfolio based on your risk capacity. Alternatively you may have the option of choosing one of several portfolios with varying proportions of stocks, bonds, and possibly other assets.

But there are some asset management services that give you the option of choosing the makeup of your portfolio yourself. Depending on the service provider, you may be able to choose which asset classes to invest in, or even choose specific index funds and ETFs from a given selection.

• Possible conflicts of interest

Some asset management service providers use their own strategy funds and structured products. While this is not necessarily a bad thing, it can create a conflict of interests, because the investment solutions used may not be the most favorable solutions available.

Sales commissions and retrocession fees paid out to asset management providers by third-party service providers are another potential conflict of interests. For example, an asset management service provider may be offered commissions to use third-party investment funds or third party custody accounts for your investment portfolio. This can provide an incentive for the asset management service provider to use expensive investment products.

These conflicts of interest are not an issue when you use a stockbroker or a savings account.

Does using an asset management service make sense?

A low-cost asset management service is a good alternative if you are looking for higher potential returns than you could earn with savings accounts but do not want to use a stockbroker. That could be the case, for example, if you prefer not to spend time or thought on investing, or if you do not feel confident buying stocks, ETF shares, or other assets on your own.

However, it is important to look for service providers that have low asset management fees, because high ongoing fees can take a substantial toll on your investment returns. It is also important to look for service providers that explicitly state that they pass any and all sales commissions and retrocession fees they receive on to you as the customer.

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