Discretionary investment management refers to a type of investment management service in which the investment manager has the authority to make investment decisions on behalf of clients without the need to obtain prior approval for each transaction. In a discretionary investment management arrangement, the client gives the investment manager a certain degree of discretion to invest the client’s funds in accordance with a specified investment objective and strategy. The investment manager is responsible for researching and selecting investments, managing the portfolio, and making investment decisions based on her expertise and the client’s objectives.
In this type of investment management, the client delegates the responsibility for day-to-day investment decision-making to the investment manager, and the client has little or no involvement in the actual investment process. Discretionary investment management is often used by high-net-worth individuals, institutional investors, and other clients who have complex investment needs and prefer to delegate the management of their investments to an experienced professional.
Advantages and disadvantages of discretionary investment management
- Professional management: Discretionary investment management provides access to professional investment management services, which can help investors to achieve their investment goals and grow their wealth over time. Professional investment managers are expected to have the knowledge, experience, and resources to make informed investment decisions that can help to maximize returns and minimize risks.
- Convenience: Discretionary investment management can be a convenient way for investors to manage their portfolios, as they do not have to spend time researching and making investment decisions. This is particularly beneficial for busy investors who do not have the time or resources to manage their portfolios on their own.
- Access to a broader range of investment opportunities: Some discretionary investment management firms might provide access to certain assets accessible only to a select few. These assets typically will be in alternative investments such as private equity, hedge funds and art.
- Cost: Discretionary investment management can be expensive, as professional investment managers typically charge fees for their services. These fees add up over time and may decrease an investor’s returns.
- Lack of control: With discretionary investment management, investors have limited control over the specific investments that are made on their behalf. This can be a disadvantage for investors who prefer to have a hands-on approach to investment management.
- Performance risk: The performance of a discretionary investment management portfolio depends on the investment decisions made by the investment manager. If the investment manager makes poor investment decisions, the portfolio may underperform its peers.
- Conflicts of interest: Discretionary investment management can be subject to conflicts of interest, as investment managers may have incentives to make investment decisions that are not in the best interest of the investor. For example, suppose a firm that provides discretionary investment management service also manufactures investment products. In that case, the investment managers of that firm might be tempted to include those investment products unnecessarily in the clients’ portfolios.
Differences between discretionary and non-discretionary investment management
Discretionary investment management and non-discretionary investment management are two distinct approaches to managing investments.
The main difference between discretionary and non-discretionary investment management is the level of control and responsibility over investment decisions. In discretionary investment management, the investment manager has the discretion to make investment decisions on behalf of the client. In contrast, in non-discretionary investment management, the client has full control and responsibility for making investment decisions. Here, the client approves each investment decision the investment management firm suggests.
Please note that DIY investing is a type of non-discretionary investment management. Here, the client not only has full control and responsibility for making investment decisions but also for researching and selecting the investments.
History of discretionary investment management
The history of discretionary investment management can be traced back to the early days of professional money management. In the late 19th and early 20th centuries, wealthy individuals and institutions began to hire professional money managers to manage their investments. These early investment managers typically had complete discretion over their clients’ investments and were responsible for making all investment decisions on their clients’ behalf.
Over time, the discretionary investment management industry has evolved and grown, with an increasing number of investment management firms offering discretionary investment management services to a wider range of clients. In the mid-20th century, advances in financial technology and the growth of the global economy helped further to spur the development of the discretionary investment management industry.
Today, discretionary investment management is a well-established and highly competitive industry, with many firms offering investment management services to clients worldwide. Discretionary investment management is more prevalent in developed markets such as the U.S., the U.K., Western Europe and Australia. However, it is prevalent to a lesser extent in developing markets such as India and China.
Despite the growth and maturity of the industry, the fundamental principles of discretionary investment management remain the same: to provide clients with professional investment management services, to help them achieve their investment objectives, and to manage their portfolios in a manner that is aligned with their investment goals and risk tolerance.
QuietGrowth and discretionary investment management
QuietGrowth provides discretionary investment management through the Managed Discretionary Account (MDA) structure. Our automated investment management service is commonly known as robo advice. Refer to our Why QuietGrowth page to know the value proposition.
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