Discretionary, Advisory and Execution-only are (essentially) the three different types of investment services you can get permissions for. Its vital businesses understand these when building out the investment products they want to offer.
Each comes with different rules and constraints to what you are able to do as a regulated business, but in simple terms, they refer to the level of involvement the user has in the control of their investments, and how much control they have given to their investment manager (or Robo) when it comes to decision-making.
XO is what it sounds like, where the company simply executes the order on behalf of the client. Typical execution-only examples might be traditional trading accounts where the user is active and decides what stocks or ETFs to buy and sell.
In terms of building a Robo-advisor, an execution-only approach would mean you presented clients with multiple options of where to invest; say a low, medium, and high-risk model portfolio, and they had the sole responsibility of deciding where they invest.
Discretionary services essentially mean investors have opted to be less involved in making decisions about their investments, and rely on the expertise of a wealth manager, financial advisor, or firm.
In terms of building a Robo-advisor, this means you (specifically an individual with authorisation internally) will take charge of the rebalancing and other investment decisions and importantly: will not require consent for individual decisions of when to rebalance, buy, or sell, as the user has giving permission for this.
As you might expect, this level of responsibility and access to your user’s investments comes with greater regulation and oversight.
Advisory services are as it sounds, you advise your users on the investment strategy you think they should take, but the investor themselves are required to make the final decision.
From a Robo-advisor perspective, this might mean you ask specific questions about the individual, their goals, and risk appetite, and then suggest a specific model portfolio for them to invest in.
Execution Only - Baskets
At WealthKernel, we’ve invented a sub-category called XO Baskets, which we believe is a unique and really innovative tool for our clients building robo-advisors.