Simply coming to the exchange and buying securities is not possible. Alexander will definitely need a professional intermediary – a broker or a portfolio manager, who must have a license from the U.S. Securities and Exchange Commission (SEC) to work with private investors.
The broker executes transactions according to the client’s instructions. In this case, it will be Alexander’s responsibility to monitor the market situation and decide when and which securities to buy and when to sell them.
For more details on this, read the article “How the Stock Exchange Works.”
The portfolio manager independently manages the client’s funds or assets to maximize profit for the owner. In this option, Alexander only needs to roughly determine where he wants to invest his funds and periodically oversee the status of his investment portfolio. The manager will execute transactions on his behalf.
Another important difference is that when signing an agreement with a portfolio manager, ownership rights to the assets always remain with the client. However, a contract with a broker often allows the broker to temporarily “borrow” the client’s funds and securities for use in their own transactions.
Therefore, in the event of a manager’s bankruptcy, Alexander can simply transfer his funds and securities to another manager or broker. In the case of a broker’s bankruptcy, there is a risk of losing all funds.
Alexander is risk-averse. Random investments in the stock market are equivalent to playing roulette for him. Portfolio management seems much safer to him than independent investments through a broker. Now he needs to determine which method of portfolio management suits him best.
What types of trust management are there in the financial market?
There are three main options: mutual funds, off-the-shelf standardized strategies offered by portfolio managers to all clients, and personalized strategies tailored to an investor’s individual preferences and circumstances.
Collective management through mutual funds. A mutual fund pools money from many investors to invest in stocks, bonds, real estate, and other assets. Each mutual fund has an investment prospectus outlining how it allocates funds among different instruments. You can review prospectuses of various funds in advance, choose a suitable one, and purchase its shares.
The fund’s assets are managed by a specialized organization called an asset management company. The better they invest the assets, the higher the value of the fund’s shares becomes, and the more profit you can make when selling them. However, if investments perform poorly, the value of the shares may decline, leading to potential losses.
Mutual funds are the most accessible form of managed investment for beginners. You can invest even a small amount, and management fees for mutual funds are relatively low, typically around 0.2% of the value of your shares. Moreover, the returns often outpace deposit interest rates by 1.5 to 2 times. However, when you sell mutual fund shares, the management company charges an additional fee of up to 3% of their price, which can reduce your overall profit.
You can purchase mutual fund shares directly from the asset management company or its agent (often a bank), or through an exchange if you already have a brokerage account.
For more details about different types of mutual funds, refer to the articles “Mutual Funds: How They Work and How to Make Money with Them” and “Exchange-Traded Funds (ETFs): What They Are and Whether Investing in Them is Worth It.”
Standard Investment Strategies. Many portfolio managers develop ready-made investment strategies and offer their clients the opportunity to join them. Similar to mutual funds, people’s money is invested according to predefined rules specific to each strategy. For instance, some involve investing in foreign stocks, others in US government bonds, and still others in structured products.
However, some securities come with a hefty price tag — thousands of dollars or tens of thousands of rubles. To participate in a strategy that entails purchasing these securities, you’d need to invest a substantial sum. In contrast, with mutual funds holding a similar asset portfolio, you can invest much less and achieve comparable percentage returns.
Today, the market boasts hundreds of standard strategies, many of which are tailored for Individual Investment Accounts (IIAs) that offer additional tax benefits.
Standard strategies often require a higher investment threshold compared to mutual funds, starting from a few thousand rubles. Management fees typically range from 1% to 2% of the investment amount. However, the returns of certain strategies can surpass those of mutual funds.
Numerous banks and asset management companies have developed mobile applications, allowing you to remotely open an account and start investing.
Personalized Management Strategies. In this scenario, a fiduciary manager develops a customized strategy for each client. This strategy takes into account the investor’s financial capabilities, the expected returns they aim to achieve, and their acceptable risk level.
This option is suitable for affluent clients willing to invest hundreds of thousands of rubles, dollars, or euros in the stock market. Management fees could reach up to 5% of the asset amount.
What are the pros and cons of fiduciary management?
Before reaching out to a portfolio manager, it’s important to weigh all the pros and cons.
Pros
Fiduciary management can yield higher returns than a bank deposit. Similar to a deposit, you won’t need to constantly monitor the market, choose securities or other assets, decide when to buy them, or when to sell. All decisions are made by the portfolio manager. Cons
Profit is not guaranteed. Investments always come with risk, and the greater the potential return, the higher the chance of losing it all. Funds in fiduciary management are not protected by a government deposit insurance system. Your earnings will depend on the decisions of the intermediary, whether they are successful or not. Therefore, selecting a fiduciary manager should be done very carefully.
How to choose a trustee?
You should only search among companies with a license from a professional participant in the securities market, which can be verified using the online directory of the U.S. Securities and Exchange Commission (SEC).
In search engines like “Google” and “Bing,” websites of financial intermediaries with licenses from the SEC have a special marking – a checkmark in a blue circle. Sites without such a symbol belong to companies that operate illegally.
In their offices, on websites, and in mobile applications, fiduciary managers are required to disclose information about themselves. This includes providing the license number, a full list of financial services, and the name of the self-regulatory organization they belong to.
When choosing a manager, pay attention to several parameters.
Credit rating. It helps understand how financially stable the company is. It takes into account the organization’s profit dynamics, debt size, capital, and other indicators. A high credit rating doesn’t guarantee investment success, but it indicates that the company handles its own assets well.
Reliability of organizations is evaluated by specialized rating agencies. Read about their criteria and where to find their ratings in the article “Credit Ratings: What They Are and How to Use Them.”
Profitability. Past profits do not guarantee future gains. Nevertheless, it’s worth finding out what benefits the strategies of the fiduciary manager brought to investors in the last two to three years. If it was lower than similar strategies from other managers or mutual funds with a similar asset structure, it’s better to search for another intermediary.
Terms and expenses. Compare the fees for services of different fiduciary managers. Higher fees are justified only if the company earns more for its clients than competitors.
In response to your inquiry, the manager must provide information about the size of their compensation and other expenses that you might incur. For example, they should warn you about fees for deposit replenishment or withdrawal of funds, the cost of depository or registrar services if their payment is made through the manager.
Convenience of communication with the manager. If you prefer to invest online, check if the company has a mobile application or website. Will it be easy for you to deposit funds and withdraw money, monitor analytics and the state of your asset portfolio in your personal account? Also, consider the responsiveness of operators in online chat.
If you are more accustomed to handling financial matters offline and prefer personal interaction with company staff, inquire about the addresses of their offices and working hours.
How to interact with a trustee?
Determine Your Strategy. Discuss with your investment manager the assets and currency in which you intend to invest. Talk about the desired returns and acceptable levels of risk, as well as specify the investment duration.
Review the Risk Disclosure. Before signing an agreement, your manager must provide a document detailing all potential investment losses. Thoroughly examine all the points in the disclosure before finalizing the agreement. Seek clarification on any unclear terms and phrases.
The intermediary should remind you that investments in securities are not insured by the government, and returns are not guaranteed; losses can occur.
Carefully Read the Agreement Terms. Clarify when and under what conditions you can fully or partially withdraw funds. In some cases, strategies may have fixed investment periods, such as three years. Find out how much of your investment you might lose if you decide to withdraw early.
At times, managers allow clients to switch from one standard strategy to another before the contract ends while retaining the already earned returns.
Finalize the Agreement and Transfer Funds. If the terms are clear and satisfactory, sign the fiduciary management agreement, open an account, and fund it. Most clients of investment managers prefer an individual investment account as it provides additional tax deductions alongside returns.
Many banks, investment firms, and management companies offer remote contract signing and fund transfers through websites or mobile apps. In such cases, it’s important to ensure you are on the official organization’s website. Learn how to differentiate genuine sites from counterfeit ones that attempt to extract money and personal information in the article “Phishing: What It Is and How to Protect Yourself.”
Monitor the Reports. While an investment manager is more knowledgeable about investments than a novice, it’s still wise to exercise control. Review the state of your account and investment portfolio at least once a month.
If you believe the strategy isn’t yielding results as expected, generating insufficient profits, or even losses, discuss this with your manager. You always have the right to adjust your individual strategy, and you might be able to switch a standard strategy to a different one.
Receive Profits and Pay Taxes. In most cases, profits can only be obtained at the end of the fiduciary management agreement. Occasionally, conditions allow for an early full or partial withdrawal of earnings. Usually, you can request funds through a personal account or a mobile app.
Income from investments is subject to income tax. However, you likely won’t have to independently file taxes, calculate, or remit the tax. Typically, the fiduciary manager handles these aspects.
For more information on when and how much you need to contribute in taxes, refer to the article “What Taxes an Investor Pays.”
The manager misinvested my money. Where to complain?
Determine Your Strategy. Discuss with your investment manager the assets and currency in which you intend to invest. Talk about the desired returns and acceptable levels of risk, as well as specify the investment duration.
Review the Risk Disclosure. Before signing an agreement, your manager must provide a document detailing all potential investment losses. Thoroughly examine all the points in the disclosure before finalizing the agreement. Seek clarification on any unclear terms and phrases.
The intermediary should remind you that investments in securities are not insured by the government, and returns are not guaranteed; losses can occur.
Carefully Read the Agreement Terms. Clarify when and under what conditions you can fully or partially withdraw funds. In some cases, strategies may have fixed investment periods, such as three years. Find out how much of your investment you might lose if you decide to withdraw early.
At times, managers allow clients to switch from one standard strategy to another before the contract ends while retaining the already earned returns.
Finalize the Agreement and Transfer Funds. If the terms are clear and satisfactory, sign the fiduciary management agreement, open an account, and fund it. Most clients of investment managers prefer an individual investment account as it provides additional tax deductions alongside returns.
Many banks, investment firms, and management companies offer remote contract signing and fund transfers through websites or mobile apps. In such cases, it’s important to ensure you are on the official organization’s website. Learn how to differentiate genuine sites from counterfeit ones that attempt to extract money and personal information in the article “Phishing: What It Is and How to Protect Yourself.”
Monitor the Reports. While an investment manager is more knowledgeable about investments than a novice, it’s still wise to exercise control. Review the state of your account and investment portfolio at least once a month.
If you believe the strategy isn’t yielding results as expected, generating insufficient profits, or even losses, discuss this with your manager. You always have the right to adjust your individual strategy, and you might be able to switch a standard strategy to a different one.
Receive Profits and Pay Taxes. In most cases, profits can only be obtained at the end of the fiduciary management agreement. Occasionally, conditions allow for an early full or partial withdrawal of earnings. Usually, you can request funds through a personal account or a mobile app.
Income from investments is subject to income tax. However, you likely won’t have to independently file taxes, calculate, or remit the tax. Typically, the fiduciary manager handles these aspects.
For more information on when and how much you need to contribute in taxes, refer to the article “What Taxes an Investor Pays.”
