The risks of investing through an asset manager

Investing always involves a risk , we all know that. But risk does not necessarily have to be bad. After all, we take all kinds of risks all day long to live a good life. A good investment result also requires calculated risks. A good spread between higher and lower risks is ‘the way to go’ with investments. What are the risks of investing through an asset manager?

Lower risk means lower return

A higher risk can mean a higher return. The exact levels of this return can vary enormously. In the history of investments, there have been shares that rose thousands of percent in a few years. Of course, increases of thirty or even 20 percent in a year are also very nice. However, investing with an asset manager also entails other risks. The risks of investing via an asset manager are highlighted below.

Bankruptcy of an asset manager

It is often thought that the bankruptcy of an asset manager means that the investment is lost. However, an asset manager is not allowed to have the deposit and returns of a client on the balance sheet. In fact, they never have the money in the account. This goes through a custodian bank, which is supervised by De Nederlandsche Bank and the Netherlands Authority for the Financial Markets. If an asset manager goes bankrupt, you can choose to invest the assets yourself, or transfer them to another manager.

Bankruptcy of a custodian bank

When investing your own capital via the custodian bank, you do not hand over the money. The money is stored via the system of the Securities Giro Transactions Act (Wge). This means that the securities are in your own name. If the custodian bank can no longer meet its obligations and is declared bankrupt, then no claim can ever be made on your deposit or capital. This capital falls outside the bank’s assets.

The deposit guarantee scheme

In the Netherlands we have a guarantee scheme for the assets that are stored at banks. This guarantee scheme runs up to € 100,000 per account holder per bank. Liquidities up to that amount are therefore ‘insured’.

Concentration risk

When you read a book about investing, the gist is usually the same: diversify your assets across different markets and investment types. Concentration risk is the risk you run when your portfolio is concentrated in one market or company. If something were to happen to that market or company, it would have 100% impact on your assets.
With a healthy diversified portfolio, the impact would be much lower in that case.

You run a risk if you invest in only stocks, or only in a certain region or even a specific company. Macroeconomic changes can cause a local market (for example America) to fall 10% or 20% in one go. This will always have an effect on your investment. But if you also have a large part of your assets invested in Europe or Asia, this can limit or absorb the damage.

Spread across asset managers

Asset managers come in all shapes and sizes. From very large to very small players, active asset managers and managers with a passive investment policy. There are specialists in specific submarkets, banking and non-banking players who can also be volume, fundamental and technically oriented. This is just a fraction of the possible differences. To familiarize you with this complex issue, we have drawn up some guidelines.

Good asset manager

The second concern is the size of the assets. As you can imagine, asset managers prefer to manage large amounts of assets rather than small ones. For this reason, some asset managers use fee tiers: the larger the assets, the lower the fee.

If you diversify, the investment is halved and you are relatively less attractive to asset managers. Note that the size of the assets to be invested is “huge” and that each asset manager also receives a significant portion of the assets under management.

The third concern is complementarity. It is important that managers complement each other. This is obvious, but we still see enough investors who allocate their assets to asset managers who are too close to each other. For example, managers who have invested in the same company or industry. This can lead to a false sense of security.

Safe investing with various managers

Good diversification means investing through various managers who have their own investment strategy. Think of managers who focus on tech all over the world, or managers who already diversify across different markets, countries and investments. Some managers invest in both monetary investments and companies, bonds , products, CFDs and indices . By ensuring that the assets are invested in a diverse way, you reduce the risk you run.

Example: An example of a diversified investment can be found here: Coen has decided to invest €10,000 in a safe diversified pot and €5,000 in a slightly riskier fund. He chooses to invest the €10,000 through a passive asset manager who distributes the assets across different indices. The AEX , S&P 500 and Nikkei. As a result, the majority of his assets grow with 3 major markets around the world. He invests the remaining €5,000 with an active asset manager with a higher risk profile. They invest the money in tech companies around the world that are in the Lowcap and Midcap categories. As a result, he runs a little more risk, but the chance of high returns is also greater.

Dividend stocks

An attractive investment can be a dividend fund. In this fund, the capital is divided over dozens or hundreds of companies in the midcap and megacap that pay out high returns via dividends. This can range from 1% to 7% per share.
Often these shares are not necessarily so-called ‘growth stocks’ but stable growers with a good payout.

Investing in foreign markets

You can reduce the risk of the investment by spreading it over different countries. Think of an American market, an Asian market and an Australian, African or European market. This way you capture different markets and you are not affected by local changes in the economy.

Example: During the COVID pandemic in 2021, the US market crashed completely, while the European and Asian markets remained more stable. Someone who was fully invested in, for example, the Dow Jones, saw huge losses, while an intercontinental investor suffered much less damage. In addition, the damage was also very different between, for example, leisure stocks and medical stocks. You can guess that medical stocks did a lot better than leisure stocks.
This shows how important it is to invest well and diversified. This can save you a lot of losses in crisis situations.

Diversifying across markets, countries and sectors offers more certainty and will ensure that your investments will perform better over the years. However, it is important to continue to balance the investments in between. Has a specific market given a lot of return? Then distribute this across the markets, so that there is not a specific market that slowly becomes dominant in the portfolio. This can negate the effectiveness of your diversification.

Is an asset manager also audited?

Not everyone is free to provide financial services in the Netherlands. Many asset managers have a license for investment services from the Netherlands Authority for the Financial Markets (AFM) and are supervised by De Nederlandsche Bank (DNB). The AFM supervises everyone who is active on the Dutch investment market and monitors the way in which we deal with our clients. De Nederlandsche Bank monitors their financial health and requires them to maintain large financial capital buffers.