To Use Discretionary Investment Management Or Not

It is a form of investment or portfolio management where the decisions to buy or sell stocks are made by the portfolio manager or investment counselor on behalf of his or her client.

At this point, you would already know that investing can be tough. From the time required, the level of research, experience, and so on, it typically pulls in a lot of factors. This is why many people pass the work on to somebody else or another company.

In previous posts, we had spoken about how we could outsource the management of our portfolio to others like asset managers or portfolio managers. We also highlighted how investment mandates are used to guide these asset managers on how to invest the investors’ funds.

Taking it a little step further, there are situations where investment managers are not told how to invest your money and rather do so based on their own discretion. This is what discretionary investment is all about.

It is a form of investment or portfolio management where the decisions to buy or sell stocks are made by the portfolio manager or investment counselor on behalf of his or her client.

It is important to add here that discretionary investment managers do not necessarily work in a bubble. They don’t just do what they feel like with investment funds they manage; rather, just as investment mandates are given to asset managers, they have an idea of what their client’s risk profile is as well as his or her financial goals. But that’s just about it – they’ll figure out which ways to invest it themselves.

These services go beyond the usual mutual fund management. As such, they are tailored to meet the needs of the wealthy or for corporate investors. For example, a pension fund might give a discretionary investment company its funds to invest on their behalf.

A key factor here then is trust. There is no way you would trust your hard earned money to somebody if you didn’t think he or she was qualified or experienced enough to make the best out of it. The client is required to have utmost trust in the capabilities of the manager.

In the same vein, the managers must have a proven track record. They must also have the right educational qualifications and accreditations. Since the investor would completely surrender his or her funds to the fund managers to make the best day-to-day investment decisions, it is paramount that proper research is taken beforehand.

The managers then have a fiduciary duty to act in your best interest always.

The benefits of discretionary investment management are in their numbers. For start, it eases the burden of the day-to-day decision making from the investor. It is also not likely that the investor has the best experiences and market information as compared to the managers – not unless it lies in his or her specialization.

Being able to pass on or delegate the investment job to a competent manager gives the investor time to focus on other aspects. Also because the discretionary managers have more market information, they can access more information. It is simple and it is effective.

However, there are also disadvantages. The first is the cost attached to it. The managers of discretionary funds usually earn a percentage of the assets under management (AUM) of a client. There are also additional fees involved and these fees will make discretionary fund management too expensive.

The expenses might be too much for a regular investor to bear. However, where you can meet the minimum investment requirements, can afford the cost required, and can, most importantly, let go of the decision making process, then finding an investment manager who would do all the work might be an option to explore.

Written by Lawretta Egba.