How To Move From Self-Directed Investing To Managed Investing

Countless investors reach a time when their wealth management needs are unmet through a self-directed approach. At that point, it can make sense to switch from self-directed to managed investing.

Many things change throughout your life, from hobbies to preferences to friends. This is because, over the years, you experience many different phases in your life. You are not the same person at 70 as you are at age 50, as you were at 21. While consistent development is natural in many aspects of your personal life, the necessity for growth can also be true with your finances.

Deciding to make a move can be tricky, though, especially if you are unaware of the benefits of managed advice. This article will answer all your questions. We’ll discuss the difference between the two types of investing, factors to consider before moving to a managed portfolio, and how to make the transition.

What is self-directed investing?

Self-directed investing depends heavily on the portfolio’s owner rather than a professional wealth manager. With these types of accounts, the investor is solely responsible for all decision-making involving the overall investment strategy, asset allocation, and individual holdings. They are also required to initiate and execute all transactions, including purchase and sell orders as well as account withdrawals. While the portfolio owner can turn to third-party resources in their research, all due diligence falls upon the investor as well.

What are the pros and cons of self-directed investing?

There are many advantages of self-directed investing, though, with these benefits, there are also drawbacks to consider.

Pros of self-directed investments

• Less costly: With self-directed accounts, the investor will pay lower fees as they take on the primary role in managing their portfolio. In Canada, self-directed accounts will pay on a per-transaction basis. They usually, however, need to cover a small account administration fee charged by the brokerage.
• Minimal up-front savings needed: Unlike with full-service brokerages, there is no minimum amount required. This makes investing accessible for those who are young or at the beginning stages of their financial journey.

Cons of self-directed investments

Simply put, the responsibility falls to the owner.

As mentioned above, those investing under a self-directed approach are solely responsible for the decisions made within the account. Some investors may enjoy learning about the financial markets and making decisions related to asset selection. Others may not find it a pleasurable experience. Learning the investment basics can take a substantial amount of time. As a result, it may be unrealistic to assume all investors are willing and able to do so.

When does self-directed investing make sense?

A self-directed approach to investing makes sense for those at the start of their wealth-building journey. Your investments can benefit from a lower fee structure when you start saving, allowing more time to put away money and see your returns compound. For someone with only a few thousand or a hundred thousand dollars, the cost associated with a managed account would not be worth it. Following a self-directed investment approach and focusing on growing your assets can be the best option if you are at the start of the wealth accumulation phase.

As you build your portfolio, you may eventually reach a stage where you become a high-net-worth investor. Managing your own portfolio at that point may no longer be wise, as you could benefit from some of the more advanced strategies employed by wealth professionals.

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What are managed investments?

Managed investments refer to an account or portfolio run by a wealth professional on behalf of an investor. As opposed to self-directed investing, a wealth manager will work with the client to develop an investment strategy. They’ll then offer guidance on implementing it. The wealth manager will take a holistic approach in their advice, assisting with everything from asset allocation and individual security selection to complex intergenerational wealth transfers.

You are not responsible for performing due diligence in a managed account where your advisor works as a fiduciary. Instead, you can rely on the investment advisor to vet each financial security before completing all buy and sell transactions on your behalf.

Last but certainly not least, managed advice also comes with the added benefit of enhanced investment and planning strategies. Some of these include taxation and insurance strategies, financial planning, and estate preparations.

What are the pros and cons of a managed account?

Along with the many benefits of hiring an investment manager, there are drawbacks associated with managed accounts.

Pros of managed investing

• Expert advice: The advantage of receiving professional guidance on your portfolio can impact many areas of your financial wellbeing. Their advice can potentially help save you money, lower your portfolio risk, and could even boost your returns. All these aspects of managed investing can add to your ability to meet your financial goals.
• Access to a broader range of investments: Wealth managers can purchase many assets, such as hedge funds or other alternative investments, on behalf of their clients. Their industry contacts, training, and experience allow them to confidently purchase financial products that may not be available to investors who follow a self-directed approach.

Related Reading: Wealth Management and Independent Advice

Cons of managed investing

• Investment management fees: Managed accounts are associated with higher prices. This is because the investor must cover the cost of receiving wealth management. In Canada, the costs for managed investing are part of a “fee-based” system. In this system, the investor pays based on a percentage of their assets. Under a fee-based account structure, the investor is usually exempt from transaction-related charges and administration fees.
• Minimum investment required: Typically, portfolio managers work with individuals who have a more extensive portfolio as they are the ones who benefit most from the services offered. Many wealth management firms have rules that reflect this, requiring a minimum threshold before their advisors can agree to manage your accounts. Often this amount is $1 million in liquid, investable assets, though the number can change based on the firm.

When does a managed account make sense?

Over your investing career, you will find that your financial needs evolve, especially as your net worth increases. As you progress in your financial journey and become a high-net-worth investor or ultra-high-net-worth, you can benefit considerably from the advice of a wealth professional. A high-net-worth (HNW) person is someone with liquid assets in excess of $1 million. These individuals have specific needs and can employ strategies not available to those with a smaller portfolio.

Having a managed account as opposed to self-directed investing makes sense when you have a high net worth person. Not only will a wealth manager guide your investment strategy and execute transactions on your behalf, but they can also add value through more advanced planning techniques.

Is a managed account worth it?

A qualified wealth manager can help you preserve your investments. They can offer tailored advice for your portfolio through asset management. They also provide a holistic look at all areas of your finances.

By creating a financial plan, the manager can identify any potential issues on your current path. They can also offer strategies for tax minimization, asset protection, charitable gifting, and transferring wealth.

There is no single definitive list of why a managed account is worth it. Ultimately, the benefits are as individual as the investors. Regardless, the drawbacks of added cost and a hefty minimum balance are far outweighed by the advantages they can provide.

So, yes, having a managed account is well worth it for countless investors.

Self-directed vs. managed investing: Which one is right for you?

Keeping your assets in a self-directed account versus a managed one is a highly personal decision. There is no “correct” approach to investing, perhaps only what is best for you.

To help determine if you would benefit from managed advice, here are a few factors to consider and questions to ask yourself:

• Your current net worth and investable assets
• Willingness to hand over control of your investments
• Current financial knowledge and level of interest in learning more about the financial markets
• Are you an advocate of do-it-yourself to save on costs? Or do you see the value in hiring experts when needed?

While there are many factors to consider, net worth is often the best indicator. High-net-worth individuals have a more complex financial situation and can benefit the most from switching to managed investing.

How to move from self-directed investing to managed investing

Deciding that it is time to trust a professional with your investments is just the first step. During the transition to a managed account, there are several factors to keep in mind.

Considerations for moving to a managed account:

• Your risk tolerance and investment objectives: An advisor will review this with you, though it is essential to consider this before selecting a wealth manager. If you understand your investment needs, you can better assess if an advisor has an investment style that aligns with your financial objectives.
• Finding a trusted wealth manager: Not all finance professionals are equally qualified, so it is vital to work with a trusted manager who can help you achieve your financial goals.
• The responsibility of your wealth manager: If your wealth advisor is a fiduciary, they are legally required to act in your best interest. While you may assume a fiduciary duty binds all financial advisors, that is not always the case, so it is best to clarify before moving to a managed account.
• The fee structure of the account: Any time you switch account types, there will be a change in the amount and calculation of the costs. A trustworthy wealth manager will explain the fees associated with the account and be sure to answer all of your questions. There should be no surprises regarding the investment management fees you will be paying.

The transition to managed investing can be nerve-racking for some investors, particularly if they have been running their portfolios for a long time. Ultimately, though, it is worth it as wealth managers can bring additional value to your finances.

Related Reading: Tips on how to find a wealth manager in Canada

Takeaways

Throughout your financial journey, your investment approach can change. A self-directed account is often a beneficial choice when you first start saving. As you accumulate assets over time, switching to a managed investment approach can provide significant value. With managed investing, your wealth management advisor will be involved in your journey, directing you at every step and helping you realize your financial goals.

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