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Why you should Consider External Asset Management

Wealth owners have an overwhelming choice when it comes to managing their investments. Wealth managers, private banks, investment platforms, and investment funds compete over assets to be invested. Furthermore, there is much information about investing; thus, some wealth owners may decide to manage their own portfolios. A less known service is external asset management, although it offers several benefits.

By Centro LawPublished 2 years ago 3 min read
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What is external asset management?

An external asset manager manages financial assets for its clients without taking them into banking custody. Since they are not affiliated with banks, brokers, and financial institutions, they are also called independent asset managers. They use various strategies to invest client funds and advise how best to allocate assets across different asset classes.

Why you may need the service

If you're looking for a comprehensive investment approach, an external asset manager might be right for you. They are not affiliated with a bank and usually choose from a broad range of investment products and solutions. Since they focus on one main service line, they have less of an incentive for cross-selling and thus are well positioned to align with your interests. They are subject to a fiduciary duty and must put their client's interests first. With that, you achieve clarity on provided services and associated costs.

Expertise in different types of investments

An external asset manager can offer various investment options to implement individualized investment management strategies. For example, some managers focus on stocks, bonds, real estate, and commodities. Others focus on alternative investments like hedge funds, private equity, and venture capital. Since they are not tied to a particular financial institution, they can offer unbiased advice and provide their clients access to specific solutions. With their best-in-class approach, you should be provided with the best-performing products in the market.

Managing risk

An external asset manager can assist with investing in assets that meet specific goals while managing risks effectively. They usually don't rely on standard model portfolios and follow a tailored approach when constructing a client portfolio. Since they are incentivized to know their clients well, they develop a deep understanding of their risk ability and tolerance, which positively impacts the suitability and appropriateness assessment. Furthermore, it supports developing and implementing long-term financial plans aligned with your retirement goals.

The importance of diversification

Investment risks are managed by diversification. You don't want to have all your eggs in the same basket. If external asset managers don't place their own products, you'll avoid concentration and credit risks due to holding too many products of the same issuer. It would be best if their regular reports also covered such risks and disclosed any eventual remuneration they may receive from other financial institutions.

Your investment framework

Depending on your requirements, you can work with more than one external asset manager to ideally ensure that niches are covered. With new cloud-based WealthTech solutions, you can also work with several custodian banks and consolidate all the information in one platform. With such aggregated data, you'll create the basis for informed decision-making.

A note about costs

There are various fee models, and often you can choose between options. While the service may not be cheaper than traditional offerings, you should have clarity on what you pay for and thus avoid hidden costs. It's worth screening the market and assessing more than one opportunity before selecting a service provider. A trusted advisor such as a private wealth lawyer can assist you in provider selection and structuring your setup. Furthermore, the external asset manager's governance and compliance framework can be reviewed to ensure complete alignment of interests.

What else should you consider?

With all the above benefits, you should still consider an independent control function to monitor the external asset manager's activities and performance. This is often overlooked but essential to achieving outstanding results. Dedicated boutiques assist with monitoring and controlling external asset managers. Furthermore, multi-family offices can also help in this regard.

In conclusion

External asset management offers many benefits for wealth owners looking for individualized investment strategies and a service provider that aligns with their interests. The wealth management industry offers many opportunities for tailored solutions. Still, wealth owners should thoroughly assess all options and consider exposure to conflicts of interest, the service provider's governance and compliance framework, access to best-in-class products, and cost transparency. There's no need to get all services from one financial institution since technology enables the collaboration of different service providers. Wealth owners should implement an independent control function in all constellations to ensure monitoring and control.

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About the Creator

Centro Law

An exhaustive and precise overview of your wealth is crucial for successful estate planning. All assets, from financial assets to luxury items, should be well listed to outline all sources of wealth and income.

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