My finances, my projects, my life
September 25, 2021

Investment advisory: proper expertise is the key to success

Professional advice can be worth its weight in gold in a challenging environment.

The general aim with all investments is to grow your capital more quickly than is possible with a savings account, or to strengthen your portfolio via diversification. In simple terms, there are three major reasons for seeking expert advice.

The fact is that most people simply do not have the financial knowledge that is necessary. In a fast-moving environment characterised by often complex economic conditions and potentially volatile financial markets, many people simply do not have the confidence to tackle financial investments alone. And quite right too! On top of this, even those with a certain level of expertise do not have sufficient time to manage their investments properly.

So the constant and often abrupt movements in markets make it difficult to properly assess emerging risks and missed opportunities. Someone you can trust to provide good advice at the right time and help you to take decisions quickly will be a great help in this situation. This type of adviser will also have enough objectivity vis-à-vis the investor, and will therefore always be able to keep a cool head.

Someone you can trust to provide good advice at the right time and help you to take decisions quickly will be a great help in this situation.

Define your profile

Choosing professional assistance with investing simply means engaging an expert to advise or manage some or all of the financial assets you intend to invest. The first step is of course to define your investor profile.

Based on personal parameters, your investor profile identifies how best to allocate your assets to achieve your investment objectives within the desired time-frame. Our experts mainly determine your investor profile on the basis of the following elements:

    • Your investment objectives with regard to capital protection, returns and investment horizon;
    • Your risk appetite and ability to withstand fluctuations in the portfolio;
    • Your understanding of financial instruments and the related risks; and
    • Your financial means and outgoings, i.e. your sources of income, financial obligations and existing financial assets.

Two options

Based on your investor profile, there are two main types of professional support: an advisory contract  or a discretionary management mandate. With an advisory contract, an expert is given the responsibility of keeping you up to date with any information required, and simplifying the decision-making process for investments. When you opt for a discretionary management mandate, you hand over the responsibility to an expert for making investments that correspond to an investment strategy you have defined together in advance.

Based on your investor profile, there are two main types of professional support: an advisory contract or a discretionary management mandate.

Most major banks in Luxembourg offer both of these alternatives, which – contrary to popular belief – are not solely reserved for private banking clients.

Clear objectives

When setting up an advisory contract or a discretionary management mandate, your objectives are clearly defined in advance (your risk appetite, investment horizon, etc.). On this basis, your investments will be managed in accordance with a pre-defined strategy under a discretionary mandate, or you will be guided with advice and information that scrupulously respects your investor profile under an advisory contract.

The conclusion of a management mandate or an advisory contract does not provide any protection against market risks, nor does it guarantee returns. Both the mandate manager and the investment advisor have an obligation to provide a service, but are not under obligation to achieve a particular result. For this reason, it is important to talk about the level of returns that can reasonably be expected. There is a cost associated with the services provided under a management mandate or an advisory contract. These costs vary greatly depending on the extent of services required. During challenging times when returns are limited, any profits generated may be diminished by these costs. This is another reason why a long-term approach to investment is recommended.

Investor profile: four risk levels

Your investor profile identifies how best to allocate your assets to achieve your investment objectives within the desired time-frame. In general terms, there are four risk levels possible:

    • Defensive. Your main objective is to protect your capital. You are very cautious and aim to minimise fluctuations, even if this means limiting returns. Investment horizon: between two and four years.
    • Low. You are looking for a slightly higher return and are willing to sacrifice some security on a small portion of your capital. You will not overreact to temporary price falls. Investment horizon: between three and five years.
    • Medium. Your situation, knowledge and objectives are such that you can seek an attractive return on a diversified portfolio, with larger positions in volatile products. Investment horizon: between five and seven years.
    • High. Your financial situation and understanding of financial instruments mean that you can be quite ambitious and take considerable risks in the pursuit of high returns. Investment horizon: between seven and ten years.