Discretionary Investment Management

What is 'Discretionary Investment Management'

Discretionary investment management is a form of investment management in which buy and sell decisions are made by a portfolio manager or investment counselor for the client's account. The term "discretionary" refers to the fact that investment decisions are made at the portfolio manager's discretion. This means that the client must have the utmost trust in the investment manager's capabilities. Discretionary investment management can only be offered by individuals who have extensive experience in the investment industry and advanced educational credentials, with many investment managers possessing the Chartered Financial Analyst (CFA) designation. Discretionary investment management is generally only offered to high net worth clients who have a significant level of investable assets.

BREAKING DOWN 'Discretionary Investment Management'

Discretionary investment management offers a number of benefits to clients. It frees them from the burden of making day-to-day investment decisions, which can arguably be better made by a qualified portfolio manager who is attuned to the vagaries of the market. Delegating the investing process to a competent manager leaves the client free to focus on other things that matter to him or her.

Discretionary investment management also aligns the investment manager's interest with that of the client, since managers typically charge a percentage of the assets under administration as their management fee. Thus if the portfolio grows under the investment manager's stewardship, the manager is compensated by receiving a higher dollar amount as the management fee. This reduces the adviser's temptation to "churn" the account in order to generate more commissions, which is a major flaw of a transaction-based investment model.

Discretionary investment management may also ensure that the client has access to better investment opportunities through the portfolio manager. The client may also receive better prices for executed trades, as the portfolio manager can put through a single buy or sell order for multiple clients.

From the client's point of view, he or she must have confidence in the portfolio manager's competence, integrity and trustworthiness. It is therefore incumbent upon clients to conduct adequate due diligence on potential portfolio managers before entrusting them with their life savings.