In the eyes of the Regulator: Portfolio, Asset and Wealth Management

A few of the most common and traditional business models in the investment services industry are Portfolio Management, Asset Management and Wealth Management. Offering investment services as defined in MiFID II, means that a license from a national competent authority (NCA) is required to allow the performance of these activities for these business models. In the case of the European Union, acquiring a license by an NCA in any Member State (e.g. CySEC in Cyprus) would – through passporting – enable an investment firm to offer these services throughout the EU.

In this article we will explore what each business model really offers and based on that, answer a question we frequently come across in discussions with our clients and partners:

In the eyes of the regulator, which investment and ancillary services do I really need to apply for, based on my planned business offering?

It all starts with Portfolio Management

A portfolio management firm would approach their services in 2 ways:

  1. Advisory management: as a team, the portfolio manager and their clients work together to evaluate how the client’s money is growing and based on that provide personalised investment guidance for the client to adjust investments and allocations as and if needed.
  2. Discretionary management: decisions and handling of investments and other financial products that make up a client’s portfolio are directly taken and controlled by the portfolio manager. In other words, it is up to the portfolio manager’s discretion. It is the portfolio manager’s duty to analyse the market and make the most informed decisions about the client’s money and investment strategy.

The guidance offered or decision taken in the advisory and the discretionary model, through the respective portfolio management service, must consider the client’s tolerance to risk, desired returns, individual characteristics, and financial goals.

In the eyes of the regulator, the minimum requirements for

  1. the advisory model of management would be the
  • investment service of Investment Advice which allows for the provision of personal recommendations to a client, either upon their request or at the initiative of the investment firm, in respect to one or more transactions relating to financial instruments,
  • and from none to a choice of ancillary services depending on the overall scope of the business.
  1. the discretionary model of management would be the
  • investment services of Portfolio Management which allows for the management of portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments.
  • and as a minimum, the ancillary service Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services if the firm wishes to hold clients’ funds.

It all starts with portfolio management, as it the basis for what more can then be offered.

When does it then progress to Asset Management?

When it comes to the financial services industry and industry’s terminology, you will hear such terms as asset manager, investment advisor, and financial advisor. Many people, even professionals, confuse these terms and use them interchangeably. Nonetheless, these professions are different in both, what they focus on and what they (are allowed to) offer or handle. This is especially the case with asset management.

An asset management investment firm, like a portfolio management investment firm, manages portfolios. Nevertheless, unlike dedicated portfolio managers, an asset manager would normally be expected to operate only on a discretionary basis, as explained above, and handle a wider range of items of value for their clients. These wider scope than portfolio management, would mean the asset manager will be involved in handling cash and other tangible physical assets like real estate and even art. The terms asset manager and asset management have become associated with high net worth individuals (HNWI) because it is this that is the clientele of choice as a demographic, as they have a sizeable and a range of assets that requires management.

In the eyes of the regulator, the requirements for an asset management investment firm would be

  • the investment services of
    • Portfolio Management which allows for the management of portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments.
    • and (potentially, depending on the exact business model) the investment service of Investment Advice which allows for the provision of personal recommendations to a client, either upon its request or at the initiative of the investment firm, in respect of one or more transactions relating to financial instruments.
  • along with the ancillary service of Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services if the firm wishes to hold clients’ funds.

The Wider Scope of Wealth Management

While asset and portfolio management focus on maximizing the value of your portfolio, through wealth management the aim is to consider everything that affects the client’s wealth. This includes portfolio and asset management, and in addition look to optimize their clients’ total wealth. In two words, wealth management.

Our lives are not linear, and thus people will not save the same in the younger part of their lives as they will later on, and they will not spend the same in their retirement as they will in the beginning of their career or family. A wealth manager will look at all these factors and scenarios and build a wealth strategy around the planned and unplanned circumstances that could make the clients’ life.

In optimizing wealth, the wealth manager looks at the entire financial picture and recommends or takes decisions based on where the client is now and where the client expects to be in the future. This is distinctly different from portfolio and asset management, in that wealth management takes an in-depth look.

In the eyes of the regulator, irrespective of the difference in business model, duties undertaken and clients’ objective, the requirements for a wealth management investment firm would be the same as those of an aseet management firm listed above.

If you require further information, please contact us. We will be glad to support you in finding the most appropriate solution or answering your questions.

#StayAhead.

Should you be interested to read about relevant topics, please visit previous articles authored by SALVUS:

The information provided in this article is for general information purposes only. You should always seek professional advice suitable to your needs.

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