What Is Discretionary Management?
Discretionary management is a type of asset management in which a financial professional makes investment decisions on behalf of clients.
The client gives the portfolio manager or investment counselor discretion over what investments to buy or sell and when to buy or sell them.
It can be used for a variety of investment strategies, including growth, income, value, and hedge fund strategies. Discretionary management can be used by high-net-worth individuals, retail investors, and institutional investors.
Individuals with substantial expertise in the investment sector and sophisticated educational credentials can only provide discretionary investment management, with many investment managers holding one or more professional designations.
How It Works
The client gives the manager discretion over what investments to buy or sell and when to buy or sell them.
Discretionary investment managers illustrate their plans systematically, making it easier to publish outcomes and exercise certain investment techniques.
Instead of being personalized or suited to a customer, investments are produced based on their strategies.
In other words, clients are divided into groups based on their stated objectives and risk tolerance.
From the pool of money invested by the clients, each group will develop an identical investment portfolio. The funds invested are weighted to the individuals' capital investments, and the customer account is separated.
Types of Investors
Three main types of investors use discretionary management: high net worth individuals, retail investors, and institutional investors.
High Net Worth Individuals
Individuals with a high net worth have a huge number of assets and have the financial means to invest a considerable amount of money.
Because they are individuals, discretionary investment managers provide them with highly customized services to match their distinct demands.
Retail Investors
Retail investors are individual investors who purchase securities for their personal investment portfolios.
Discretionary management can be helpful for retail investors who don't have the time or expertise to manage their investments.
Discretionary investment managers provide them with less customized services; nonetheless, they can build up multiple investment vehicles with a specific strategy that may suit different groups of investors with varying risk preferences.
Institutional Investors
Institutional investors are organizations that invest on behalf of their members, such as pension funds, insurance companies, and endowments.
Institutional investors can use discretionary management to achieve their investment goals.
Benefits of Discretionary Management
Discretionary management can provide many benefits, including:
Tailor-made Approach
Discretionary management is a tailor-made approach that is customized to each client's specific needs and goals.
This type of management can provide a higher level of service than non-discretionary managers typically offer.
Flexibility
Discretionary management provides flexibility to make changes to the investment portfolio as market conditions change.
This type of management also allows the manager to take advantage of opportunities that may arise in the market.
Objective Advice
Discretionary management can provide objective advice because the client's personal preferences do not influence the investment manager.
The investment manager makes decisions based on what they believe will generate the best return for the client.
Risks of Discretionary Management
There are some risks associated with discretionary management, including:
Loss of Control
When you give someone else discretion over your investments, you are giving up some control.
You may disagree with every investment manager's decision, but you will have to trust that they are making decisions in your best interest.
Conflicts of Interest
There is a potential for conflicts of interest to arise when the investment manager has discretion over your investments.
For example, the investment manager may be tempted to make decisions that are not in your best interest in order to generate more commissions or fees.
Higher Fees
Discretionary management typically comes with higher fees than other types of investment management.
This is because the investment manager provides a higher level of service and more customized advice.
Underperformance
There is always the risk that the investment manager will underperform.
Even with the best intentions, there is no guarantee that the investment manager will be able to generate a positive return on your investment.
Conclusion
Discretionary management is a type of investment management where the investment manager has discretion over the client's investments.
This type of management can provide a higher level of service and more customized advice than other types of investment management.
However, some risks are associated with discretionary management, including loss of control, conflicts of interest, and higher fees.
Before deciding to use discretionary management, you should carefully consider these risks and determine whether this type of management is right for you.
FAQs
1. What is Discretionary Management?
Discretionary management is a type of investment management where the investment manager has discretion over the client's investments.
2. How does Discretionary Management work?
The investment manager makes decisions based on what they believe will generate the best return for the client.
3. What types of investors utilize Discretionary Management?
High-worth individuals, retail investors, and institutional investors may utilize Discretionary Management.
4. What are the benefits of Discretionary Management?
Benefits of Discretionary Management can include a tailor-made approach, flexibility, and objective advice.
5. What are the risks of Discretionary Management?
Risks of Discretionary Management can include loss of control, conflicts of interest, higher fees, and underperformance.
