There are various ways of reducing the risk of investing in equities. The most important is to invest in a portfolio of securities. The value of having a wide portfolio of different securities, instead of concentrating investment on a small number of individual stock or share items, is the reduction in the risk of a poor return. The investor in a portfolio is not putting all his eggs in one basket so that if one share performs badly, it is likely to matter very much because the other stocks and shares in the portfolio might perform well.
Investment management is the total administration of a customer’s portfolio of stocks and shares and unit trust holdings etc. if a bank provides an investment management services, it does so through a separate department or subsidiary company. The service will be provided within the framework of a formal customer agreement. To the banks which offer the service, investment portfolio management is really only profitable for large sums of money invested (perhaps $10,000-$50,000 or more). With smaller sums, the bank might try to persuade the customer to opt for unit trusts, instead of a personal portfolio of investments.
Risk can also be reduced by taking time and trouble to study the Stock Market in depth, and to make well informed investment decisions. An investor who knows more about financial matters and the Stock Market is likely to make better investments that produce a higher return. Not all investors have the time to study the Stock Market. They can improve their chances of doing well by obtaining expert advice, or asking an investment manager to make the investments on their behalf.
When a customer asks a bank to act as investment manager on his/her behalf, there are two different arrangements which might be made.
- The customer can give the bank a free hand to change the investments in the customer’s portfolio (to sell off some items and purchase new one) at the discretion of the banks investment managers. The customer will be told about the changes some time later. When the bank is given a free hand with investment decisions, the customer has a discretionary account.
- With a non-discretionary account, the bank must refer all proposed changes in the portfolio to the customer for approval.
The bank will prefer discretionary accounts to non-discretionary accounts in the case of small investors. With both discretionary and non-discretionary accounts, the bank will do all the routine paperwork, including dealing with rights issues and bonus issues of shares, redemptions of loans, and preparing a schedule of transactions for capital gains tax purposes. The bank will also hold the investors share certificates for safekeeping, and will handle the receipts of dividends and interest.
A banks fee for acting as investment manager is related to the value of the portfolio. This tends to mean that larger portfolios are much more profitable to manage, because fees are much higher, and are more able to cover direct cost and overheads and so make a profit. For the banks which offer an investment management service.
When a personal customer visits his bank to ask for investment advice, he does not expect just to be told that the bank has some experts that he can talk to. It is the job of the bank staff to be able to discuss investment matters in general terms and also to consider the customers financial position as a whole.