Asset Management Risks to Be Aware Of

Asset management services offer an alternative to investors who prefer not to invest directly using a stockbroker. You entrust an asset management provider with the task of putting together an investment portfolio based on your risk profile.

But just because you do not manage investments yourself does not mean that there are no investment risks. Just like when you invest yourself, your assets can lose value at any time, and you invest completely at your own risk. Because you give the asset management provider a full power of attorney over your money, it is very important to use a reputable service provider. Tip: The asset management comparison on moneyland.ch only includes Finma-approved service providers.

In this guide, moneyland.ch highlights the various risks that you should be aware of before investing your money using an asset management service.

Market risks

Nobody – professional asset managers included – can predict how markets will develop in the future. The basic risk of losing money if markets do not develop as hoped is the same whether you use an asset management service or invest yourself using a stockbroker.

It is important to note that macroeconomic developments are intertwined across markets, and are also affected by sporadic, unforeseeable events. Even professionals cannot maintain a constant overview of all possible market factors.

Operational risks

Although asset management services are generally run by experienced specialists with extensive knowledge of the financial world, even experts are not immune to making mistakes.

Mistaken market evaluations and incorrect choices of financial instruments can never be ruled out completely. The asset management service may also make decisions that run contrary to your investment goals or are not aligned with your risk profile.

Clerical errors – such as mistakes resulting from incomplete or incorrect instructions – are also possible.

High fees and charges

There are many fees and charges that can apply to asset management. Many of these costs depend on which service provider you use. The most important costs are the asset management fees charged by the service provider, and the TER fees charged for the funds or other investment vehicles used for your portfolio. Passively-managed funds – like index funds and index ETFs – normally have lower TER fees than actively-managed funds.

Fees and charges detract from your investment returns. Even if your investments perform well, high fees and charges can eat away a large part of the profits. Because costs have such a big impact, it is very important to compare asset management offers beforehand. Make sure to also account for online-only asset management services, as these are often cheaper than offers from brick-and-mortar banks.

Conflicts of interest

Not all asset management providers have only your best interests in mind. In some cases, service providers may use the funds or other investment vehicles that are most profitable for them, at your cost.

Incentives often play a role. For example, fund managers may pay sales commissions to asset management providers who use their funds in customer portfolios.

You can avoid the conflicts of interest caused by sales commissions by only using service providers that either use only commission-free products, or pass on all sales commissions to you as the customer. While asset management providers are theoretically required to pass on sales commissions to you, they can include clauses in their contracts that waives your right to these.

Counterparty risks

Counterparty risk is the risk that a service provider whom you entrust money to may eventually have difficulty repaying the money, or even go bankrupt. In the worst case, you could end up losing all of the entrusted money. The scope of this risk largely depends on which investment vehicles are used in your portfolio.

For example, bonds have a counterparty risk because if the creditworthiness of the company or government that issues the bonds goes down, the value of the bonds will also go down. If a company or government becomes insolvent, their bonds can become completely worthless.

Tracker certificates and other structured products also have counterparty risk. They are simply debt claims against the issuing bank or other company, and do not give you a claim to underlying assets.

Market liquidity risks

Not all assets can be quickly and easily converted into cash. That is also true when you invest through an asset management service. Examples of investments that can take time to liquidate include alternative assets, real estate, and private equity. Collectibles and other tangible assets also fall into this group.

If your asset management provider uses illiquid assets in your portfolio, it can be difficult to withdraw from investments on short notice. In addition to being frustrating, these delays can also lead to financial losses – such as missing the opportune time to buy or sell investments.

Currency exchange risks

If your asset management provider invests in foreign assets, then currency fluctuations are another risk you will be exposed to. If the corresponding foreign currency loses value against the Swiss franc, the actual return or loss in Swiss francs will be reduced or multiplied respectively.

Disclaimer: This article is provided for informative purposes only, and should not be considered as investment advice. The publisher does not accept any liability in connection with this publication.

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