Who’s the best manager for my Isa – me or the experts?
After navigating through the maze of different sorts of Isas, I decided to open an account of my own for the first time. An individual savings account (Isa) can come in many varieties and each one may offer a different management style.
When opening my account I had to choose between two management styles, an ‘execution-only’ Isa or a ‘discretionary investment management’ Isa.
A discretionary investment management Isa means that the company managing your Isa chooses what they think is the best investment for your risk profile, and the investments – the shares, funds and bonds they buy - are made at their discretion, not yours. Management of the account, of course, comes at a cost – and the cost of a discretionary manager can be expensive.
A execution only account means that you have control – the DIY Isa. With this, the company just carries out your instructions when you have decided what to invest in. Again, there are costs involved but they are obvious and paid directly by you. This includes dealing costs and other associated costs that come with buying and selling shares. The entire process from researching to trading is carried out by you.
When faced with choosing between these two management styles, I (perhaps naively - we’ll see) fancied my chances at picking my own investments and went for an execution-only account. I didn’t quite know what I was in for.
When I had to make my own investment decisions I suddenly felt a huge amount of pressure to make the “right” decision (one that would make me money). So I spent hours researching, reading reports, looking at balance sheets and making predictions. After four hours, I picked my first investment. I took my own advice and bought into an inflation linked fund.
Is four hours enough? Possibly not. And having gone through this process each time I invest, I’ve begun to appreciate some of the benefits of a discretionary investment manager.
The big one is time. Building a truly diversified portfolio takes lots of it.
Another benefit of a discretionary manager is that they are experts in their respective field. While I read the Financial Times now and again, the managers of the discretionary accounts will have years of relevant study and experience under their belts. So they should be able to pick my investments better than I can.
There are definitely benefits to having an execution-only Isa account. If nothing else, you feel the pressure of having to learn about the world of finance. There’s no greater incentive to learn than the prospect of losing some and maybe even all of your savings. . The financial system is vast and complicated, it’s even a little bit intimidating at times. But the better you understand it, the more likely you’ll make money out of it.
And of course, you don’t need to dive in at the deep end, picking your own shares is the higher-risk end of investments. Funds, where a manager selects a wide basket of financial instruments for you, are also available within a DIY Isa.
An execution-only account might be a great learning experience and a discretionary account could give you peace of mind. They’ve each got their own benefits and the choice is completely up to you.
Read more: Is investing for me?