Discretionary Investment Management: Overview, Advantages and Risk


What is discretionary investment management?

Discretionary investment management is a form of investment management in which buying and selling decisions are made by a portfolio manager or investment advisor on behalf of the client. The term “discretion” refers to the fact that investment decisions are made at the discretion of the Portfolio Manager. This means that the client must have the greatest confidence in the skills of the investment manager.

Discretionary investment management can only be offered by individuals with extensive investment industry experience and advanced training. Many investment managers have one or more job titles such as Chartered Financial Analyst (CFA) and Chartered Alternative Investment Analyst, Chartered Alternative Investment Analyst (CAIA), Chartered Market Technician (CMT), or Financial Risk Manager (FRM).

Understand discretionary investment management

In general, there are two types of investment management styles:

  • Non-discretionary investment management
  • Discretionary investment management

Non-discretionary investment managers are distinguished by the fact that they conduct all research and recommendations of the investment process. However, clients reserve the right to make the final investment decision. This is effective because investment managers do not have to risk making the wrong decision and the client remains responsible for the decisions that are made while continuing to receive professional research and advice.

The limitation, however, is that decisions can be made much more slowly and not more efficiently when the final decision is left to the customer. Therefore, discretionary investment management can be more effective in implementing investment strategies in a timely manner, as there is no need to consult the client before making an investment decision.

However, discretionary investment managers do not have complete freedom of choice. Managers must make decisions based on client preferences, which are generally set out in an investment policy statement (IPS). The IPS is a detailed document that describes clients’ investment preferences and restrictions and is highlighted by the client’s risk-return profile. The document will be flexible over time as customer preferences and tolerances can change dynamically over time.

How discretionary investment management works

Discretionary Investment Managers demonstrate their strategies using a systematic approach that facilitates performance reporting and specific investment strategies are used. Investments are not personalized or tailored to a customer.

Rather, investments are made according to customer strategies. In other words, customers are grouped according to their key goals and risk tolerance. Then each group will have the same investment portfolio created from the money pool deposited by clients. The customer’s real account is segregated and the funds invested are weighted with the individuals’ capital investments.

Advantages of discretionary investment management

The benefits of using a discretionary investment management include:

  • Convenience: Customers don’t have to waste time worrying about the return on their investments. You can easily put your capital with a professional who will oversee your investments on your behalf.
  • Excessive Return: When properly incentivized, investment managers seek to outperform clients who are above their benchmark.
  • Access to Expertise: Investment Managers are typically professionals who understand the financial markets and invest more than the average person. In theory, this should result in a better return than a personal investment.
  • Economies of scale: Customers can pool their capital and access economies of scale in the form of lower trading fees and block operations.

Discretionary Investment Management Disadvantages

The risks associated with using a discretionary investment manager include:

  • Fees: Discretionary Investment Managers charge a fee for their services and take a portion of the ultimate return a client receives.
  • Underperformance: Due to the unpredictability of financial markets, there is a strong possibility that the Investment Manager will underperform its benchmark.
  • Confidence in the Manager: Clients must have the greatest confidence in the Investment Manager in order to make the best investment decision. However, many clients may feel anxious if they start losing money and want to withdraw their capital from the discretionary investment manager, which limits the manager’s ability to execute their strategies.

Discretionary investment management vs. Advisory Investment Management, Which service is best?

Discretionary investment

Discretionary investment management means that business decisions for clients are made at the discretion of the portfolio manager within the parameters set by the client at the beginning. This means that a company can make routine changes and realignments to a client’s portfolio without first contacting them. However, if a company wants to make a change outside of the agreed mandate, it must first get the customer’s consent.

Discretionary management is often outsourced to a discretionary fund manager (DFM), but a client can also grant an advisor discretionary permissions.

What is advisory investment management?

Advisory investment management means that the advisor makes recommendations based on the client’s circumstances, goals and risk tolerance. However, you cannot respond to these recommendations until the customer has granted specific permission.

Are there any similarities?

Regardless of the service, the advisor is responsible for ensuring that the investments made are continuously appropriate and correspond to the goals and risk profile of the client.

Within portfolio management there are usually two offerings: bespoke and managed (model) portfolio service. A managed portfolio is a model portfolio developed by a DFM or advisor and typically has different risk profiles and objectives to suit a wide variety of clients. A bespoke service is fully customized and tailored to more specific needs.

What are the main advantages and disadvantages?


  • Advisory management supports customer loyalty and loyalty the customer remains in control as every action must be approved
  • Discretionary management takes advantage of market opportunities immediately. Easily outsourced to benefit from specialized investment knowledge and systems, as well as reducing ongoing fund spending and making a wider choice of investments


Advisory management: Every action must be approved by the customer. This is time-consuming and can result in lost investment opportunities. Intense work for the customer and the consultant

Discretionary management: Less control over the client’s daily investment decisions
Is there a difference in cost?

The costs in the investment industry are very different and each product has to be considered separately. Usually, there is not much of a cost difference between the two management styles, especially when portfolio management is outsourced. Specialized DFMs often benefit from institutional purchasing power and the resulting lower fund costs. transferred to the customer.

Which service is best?

While there are pros and cons for both, it comes down to personal preference. Clients who want to be closely involved in day-to-day investment decisions can opt for an advisory service, otherwise a discretionary service may be more suitable.

The past two years have seen periods of market turmoil when advisors would be better positioned to serve their clients if they had discretionary powers. By the time the advisory process is complete, it may be too late to anticipate or even react to market movements. The consensus is that volatility persists and so this should be taken into account when deciding on advisory management.

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