You've put money aside for your child and you'd like to invest it. Very soon, the bank asks you a question: "How would you like to work with us?" Do it yourself, take advice, or sign a discretionary mandate: there are three main ways. To understand them, think of a car journey.
In short: a discretionary mandate is a contract in which you give a professional the right to choose and manage your investments on your behalf, according to rules agreed together, in return for fees.
1. Driving yourself
You choose and place your own orders; the bank or platform carries them out (this is called execution only). The lowest fees, total freedom… and total responsibility. The trap: thinking you're a racing driver. Brad Barber and Terrance Odean showed that private investors who buy and sell most often get the worst results.
2. The instructor beside you: the advisory mandate
An adviser suggests investments, but you decide. You keep your hands on the wheel. It's a good way to learn, as long as you understand what's being suggested and know how the adviser is paid.
3. The taxi: the discretionary mandate
You give the destination (your goal, your time horizon, the risk you accept) and a professional drives. They buy and sell for you, without asking each time. It's comfortable, but the meter is running: fees are often the highest of the three.
The driver and his interests
In 1976, Michael Jensen and William Meckling described an age-old problem: when you hand a task to someone, their interests aren't always exactly yours. A taxi driver paid by the mile isn't necessarily keen on the shortest route. A manager paid on every transaction may be tempted to make lots of them. That's not an accusation: it's a question of the rules of the game. Hence the importance of knowing how you pay them.
The meter, in figures
CHF 50,000 invested for 20 years, with an average return of 5% a year before fees (not guaranteed):
- with fees of 0.2% a year: about CHF 127,700;
- with 1%: about CHF 109,560;
- with 1.5%: about CHF 99,490.
More than CHF 28,000 between the first and the last, for the same journey. A good driver can be worth the fare; you just need to check.
Five questions to ask before you sign
- How much will I pay in total, in francs, each year?
- How are you paid? Do you receive commission on the products you choose?
- How much risk will you take, and what happens if markets fall by 30%?
- What will you compare your results against?
- Can I end the mandate easily, and at what cost?
Try this tonight with your child
Play family taxi. Your child hands you 10 counters for a week. Offer two contracts: either you take 1 counter as commission whatever happens, or you take 1 counter only if you give them back more than 10. Ask which they prefer, and why. They've just discovered the problem every person who hands over their money faces.
Read also: The hare, the tortoise and your savings · How much does it really earn?
Further reading
- Jensen, M. C. & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305–360.
- Barber, B. M. & Odean, T. (2000). Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Journal of Finance, 55(2), 773–806.
Teach them to keep their hands on the wheel. Join the Mangosteen Buddy waitlist: Book 1 of the comic is free, and the first 500 families get their first year of Premium on us (worth CHF 150). Save my place
Educational content, not investment advice. Returns are not guaranteed; the figures come from a simplified example.