Behind the Curtain: Understanding Discretionary Portfolio Management

Simply put – Discretionary portfolio management is a form of investment management where all investment 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 service can only be offered by individuals who have extensive experience in the investment industry and advanced educational credentials like the Chartered Financial Analyst (CFA) designation. For the most part, discretionary investment management is only offered to high net worth clients who have a significant level of investable assets.

Delegating the investing process to a competent Discretionary Portfolio Manager offers a number of benefits to clients:

  • It frees clients from the burden of doing all the research required to make all the day-to-day investment decisions.
  • It removes the possibility of acting emotionally when making the decision to buy or sell an asset.
  • It 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 Advisor’s temptation to “churn” the account in order to generate more commissions, which is a major flaw of a transaction-based investment model.
  • Ensures that the client has access to better investment opportunities that are not always available to investors.
  • Better prices for executed trades, as the Portfolio Manager can put through a single buy or sell order (block trade) for multiple clients.
  • Properly utilized a Discretionary Portfolio Manager can help clients reduce risk, reduce taxes, reduce fees and enhance performance.

Client must have confidence in the Portfolio Manager’s competence, integrity and trustworthiness. It is therefore important that they conduct adequate due diligence on potential Portfolio Managers before entrusting them with their life savings. Ideally a referral from your Financial Advisor makes the most sense.

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