Discretionary Investment Management: Definition and Key Considerations

Discretionary investment management is a type of investment management where a professional investment manager makes investment decisions on behalf of a client.

The investment manager has the freedom to make decisions without being tied to a specific investment strategy or mandate. This allows them to adapt to changing market conditions and make decisions that are in the best interest of the client.

A discretionary investment manager typically has a deep understanding of the client's financial goals, risk tolerance, and investment horizon. They use this information to create a customized investment plan that aligns with the client's objectives.

Discretionary investment management is often used by high net worth individuals, families, and institutions who require a tailored investment approach.

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Discretionary investment management is a type of investment management where the investment manager has the authority to make buy and sell decisions on behalf of the client.

The investment manager's strategy may involve purchasing a variety of securities, including stocks, bonds, ETFs, and financial derivatives, as long as it falls in line within the client's risk profile and financial goals.

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Discretionary investment managers typically work with high-net-worth individuals and institutional investors, such as pension funds, who have a minimum investment requirement of $250,000 or more.

There are two broad types of investment management styles: non-discretionary and discretionary. Discretionary investment managers make investment decisions on behalf of the client, while non-discretionary managers provide research and recommendations, but the client retains the right to make the final decision.

Discretionary investment managers must make decisions according to the client's wishes, which are usually outlined in an Investment Policy Statement (IPS). The IPS outlines the client's investing preferences and constraints, including their risk-return profile.

Discretionary investment managers typically have extensive experience in the investment industry and advanced educational credentials, such as a Chartered Financial Analyst (CFA) or Chartered Alternative Investment Analyst (CAIA) designation.

Discretionary investment management can only be offered by individuals who have a high level of trust and ethical considerations, as they are responsible for managing the client's capital and must answer to the client if they underperform.

To ensure transparency and accountability, discretionary investment managers typically agree to set parameters at the outset, such as specific investment mandates or restrictions on certain stocks.

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Here is a summary of the key characteristics of discretionary investment management:

Discretionary investment management requires a high level of trust and ethical considerations, as the investment manager is responsible for managing the client's capital and must answer to the client if they underperform.

The investment manager does not need to write to the client each time they wish to make a change, but rather can make changes at their discretion, as long as they stay within the agreed-upon parameters.

Discretionary investment management offers several benefits to clients, including freedom from day-to-day investment decisions and the potential for better investment opportunities through the portfolio manager.

Delegating the investing process to a competent manager aligns the investment manager's interest with that of the client, reducing the adviser's temptation to "churn" the account to generate more commissions.

The minimum account balance and high fees can be a big hindrance to many investors, especially those just starting out.

A new investor with a small amount to invest would not be able to benefit from this style of investment.

Confidence in the portfolio manager's competence, integrity, and trustworthiness is crucial for clients, and conducting adequate due diligence on potential portfolio managers is essential.

Discretionary investment managers can make numerous changes throughout a year, making the strategy nimbler and providing opportunities for better risk-adjusted returns.

Investors into a discretionary managed portfolio can expect to be kept up to date with investment changes once they have taken place, rather than being communicated to prior to each portfolio change.

Discretionary management offers several benefits to clients, freeing them from the burden of making day-to-day investment decisions.

It aligns the investment manager's interest with that of the client, as managers charge a percentage of the assets under administration as their management fee, which reduces the temptation to "churn" the account.

Delegating the investing process to a competent manager leaves the client free to focus on other things that matter.

Discretionary investment management ensures that clients have access to better investment opportunities through the portfolio manager.

Portfolio managers can act on available information quickly and efficiently, selling the position out of all their accounts in a single, cost-effective transaction.

This approach also allows for better risk-adjusted returns, as discretionary investment managers can make numerous changes throughout a year.

Discretionary management enables larger calls with investment decisions, such as stock or asset class selection, as managers can make any change knowing it can be switched or remedied with minimal delay.

By utilizing a discretionary investment manager, clients can benefit from a more reactive approach to market cycles, making timely changes to investment decisions.

Discretionary management can be a big hindrance to new investors due to the minimum account balance and high fees.

A new investor with a small amount to invest would not be able to benefit from this style of investment.

There's a risk of entrusting money to a portfolio manager who is either unscrupulous or pays little heed to a client's stated goals.

Investors must conduct adequate due diligence on potential portfolio managers before entrusting them with their life savings.

There's a solid possibility that the investment manager will actually underperform their benchmark due to the unpredictability of financial markets.

Discretionary investment managers can make numerous changes throughout a year, but this also means they can make mistakes that affect your investment.

Discretionary investment management caters to various investor types with distinct needs. High net worth individuals, for example, can commit significant capital and receive tailored services from discretionary investment managers.

These managers may choose to invest in companies with strong Environmental, Social, and Governance (ESG) initiatives, avoiding fossil fuel energy companies or those in the tobacco industry.

Institutional investors, on the other hand, manage capital on behalf of funds or institutions, requiring more tailored investment offerings. They may need long-term time horizons for investments or short-term liquidity to make claim payouts.

Some common examples of institutional investors include endowment funds, pension funds, commercial banks, mutual funds, hedge funds, and insurance companies.

Here are some examples of institutional investors and their needs:

Retail investors are everyday investors who, individually, do not possess a significant amount of capital. They often rely on discretionary investment managers to guide their investments.

Discretionary investment managers provide less personalized services to retail investors, but can still create tailored investment vehicles to fit different groups of investors with various risk preferences. These investment vehicles can be set up as mutual funds with specific strategies.

For example, a manager may set up a mutual fund that focuses on investment-grade fixed-income securities, which is suitable for investors with lower risk tolerance or those close to retirement. On the other hand, a manager may set up a mutual fund that focuses on small-cap tech equities, which is suitable for investors with higher risk tolerance and a desire for exposure to the tech industry.

Retail investors can benefit from these tailored investment vehicles, which can help them achieve their financial goals while managing their risk.

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To determine the best option for you, it's essential to clarify the type of ongoing relationship and involvement you want with your investment strategy, ensuring it aligns with your specific objectives and circumstances.

You'll need to decide how involved you want to be with each investment decision. Do you prefer to leave the day-to-day management of your portfolio to a professional?

Leaving the day-to-day management to a professional can be a good option if you're not interested in being heavily involved in investment decisions. On the other hand, having an ongoing dialogue with your adviser can be beneficial if you want to stay informed about investment changes.

Your adviser will be able to discuss the merits and drawbacks of each option with you, taking into account any personal considerations that might need to be accounted for. They'll help you make an informed decision that suits your needs.

Ultimately, the best option for you will depend on your individual circumstances and objectives.

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