What is discretionary investment management?
Discretionary investment management means trading decisions are made for clients at the portfolio manager’s discretion within parameters set by the client at the outset. This means a firm is able to make routine changes and rebalances to a client’s portfolio without the need to contact them beforehand. However, if a firm wishes to make a change outside the agreed mandate, they would need to seek approval from the client first.
Often, discretionary management is outsourced to a Discretionary Fund Manager (DFM) but equally a client can give an adviser discretionary permissions.
What is advisory investment management?
Advisory investment management means that the adviser will make recommendations based on a client’s circumstances, objectives and attitude to risk. However, will be unable to act on these recommendations until specific authority has been given by the client.
Are there any similarities?
Regardless of the service, the adviser is responsible for ensuring that any investments made are continually suitable as well as in line with a client’s objectives and risk profile.
Within portfolio management there are typically two offerings, bespoke and managed(model) portfolio service. A managed portfolio is a model portfolio put together by a DFM or adviser, typically with varying risk profiles and objectives to suit a wide range of clients. A bespoke service is fully personalised and designed to meet more specific requirements.
What are main advantages and disadvantages?
- Supports client interaction and engagement
- Client maintains control as every action must be approved
- Ability to take immediate advantage of market opportunities
- Can be easily outsourced to benefit from specialist investment knowledge and systems as well as reduced ongoing fund charges and wider investment choice
- Every action must be approved by the client which is time consuming and can mean investment opportunities are missed
- Labour intensive for both client and adviser
- Less control over day-to-day investment decisions for the client
Is there a cost difference?
Cost in the investment industry varies greatly and each product should be considered based on its own merits. There is typically not a huge cost difference between the two management styles, particularly when portfolio management is outsourced, specialist DFMs often benefit from institutional buying power and the resulting lower fund charges which are passed on to the client.
Which service suits me best?
Whilst there are advantages and disadvantages to both this comes down to personal preference. Clients who wish to be heavily involved in the day-to-day investment decisions may wish to opt for an advisory service but otherwise a discretionary service may be more suitable.
Over the past couple of years there have been periods of market turbulence where advisers would have been better positioned to service their clients if they had discretionary permissions. By the time the advisory process is complete it may be too late to pre-empt or even react to market movements. The consensus is that the volatility will continue and therefore this is something to consider should you opt for advisory management.
For investment advice, please contact Natasha Hellewell