a form of investment management where an investment counselor makes buying and selling decisions on behalf of the client at their discretion, relieving the client of key business decisions and placing this responsibility in the hands of a well-trained domain specialist.
Discretionary Management Details
The decisions made by the portfolio manager are not catered to the needs of any single client but instead focus on client strategies. Clients are grouped based on their investment preferences and risk tolerance. A portfolio manager is then assigned to this pool of clients. The investments are strategically made by the portfolio manager using the pool of money accumulated from the deposits made by the clients.
There are several types of investors based on their investment acumen, asset worth, and risk tolerance. Individuals who have a significant amount of assets at their disposal are referred to as high-net-worth individuals. They receive discretionary management services tailored specifically for their needs. Individuals who do not have a huge amount of capital to invest are called retail investors.
Real World Example of Discretionary Management
One of the major discretionary management service providers is Barclays Wealth and Investment Management. Barclays offers Portfolio Management Services (PMS) where the client portfolio is constructed based on the investment preferences and the risk tolerance specified by the client. A professional portfolio manager is assigned to the client.
Barclays Wealth and Investment Management offers discretionary and non-discretionary Portfolio Management Services. In discretionary management, the portfolio manager is responsible for the key buying and selling decisions on the client's assets. These decisions are made based on the client's investment preferences.
In non-discretionary portfolio management services, the portfolio manager helps the clients in an advisory role. The portfolio manager suggests investment ideas, but the final decision rests in the hands of the client. The choice and timing of the investment rest in the hands of the clients, but the final execution is made by the investment manager.
Significance of Discretionary Management
Discretionary investment management offers a lot of benefits to clients. Clients do not need to worry about making day-to-day investment decisions. This is helpful for clients who have little to no knowledge of how the investment world works. The responsibility for making key investment decisions is made by highly skilled portfolio managers who have vast experience in the field of investments.
Discretionary investment managers have the end responsibility of making buying and selling decisions on behalf of clients. The final decision is made by these investment managers. This is helpful for clients who have a significant amount of capital to invest but are not completely aware of the complexities of the investment world.
The major risk involved in discretionary management services is the high management commission charged by the portfolio managers for the services provided by them. This creates a dent in the investment returns that the client receives. Discretionary management is built on trust between investment managers and clients. If the clients begin doubting the capabilities of the manager, it can seriously impact client strategies and result in poor asset performance.
Discretionary Management vs Non-Discretionary Management
Non-discretionary managers are not responsible for the key buying and selling decisions on the client's assets. These managers only have advisory power over the clients and the final decision rests in the hands of the clients. The investment managers do not bear the risk of making investment decisions on behalf of the clients.
Discretionary management is useful in scenarios where the client is confident with his expertise in the investment world but still wants to receive professional advice from portfolio managers. The speed at which the decisions are made might be a bit slow as the responsibility rests with the client.
However, the discretionary manager does not have free reign over the decisions as the decisions must be made based on the client's wishes outlined in the Investment Policy Statement (IPS). This statement outlines the client's wishes and preferences. It also highlights the risk tolerance of the client. The investment manager makes decisions based on this policy statement. This document is flexible and can be dynamically changed over time as the client preferences and risk tolerance can change throughout the investment period.