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 one or more professional designations such as Chartered Financial Analyst (CFA), Chartered Alternative Investment Analyst Chartered Alternative Investment Analyst (CAIA), Chartered Market Technician (CMT) or Financial Risk Manager (FRM).
Discretionary Investment Management
Definition
Discretionary investment management is a form of investment management where buy and sell decisions are made by a portfolio manager or investment advisor on behalf of the client. The term 'discretionary' means that the investment decisions are made at the discretion of the portfolio manager. This implies that the client must have a high level of trust in the manager's abilities.
Origin
The concept of discretionary investment management originated in the early 20th century as financial markets became more complex and specialized. Investors began to seek the help of professionals to manage their portfolios. Over time, this form of management evolved and became standardized, forming a crucial part of the modern investment management industry.
Categories and Characteristics
Discretionary investment management can be divided into active management and passive management. In active management, the investment manager actively seeks market opportunities, attempting to outperform the market through stock selection and market timing. Passive management, on the other hand, primarily aims to achieve market-average returns by replicating market indices. The advantage of active management is the potential for excess returns, but it comes with higher risk; passive management offers lower costs and relatively lower risk.
Specific Cases
Case 1: An investment firm provides discretionary investment management services to a high-net-worth client. The investment manager, through thorough market analysis and research, decides to invest in technology and healthcare stocks. Over time, the client's portfolio achieves significant excess returns.
Case 2: Another client opts for a firm that primarily engages in passive management. The investment manager manages the client's portfolio by purchasing market index funds. Although there are no excess returns, the client's portfolio performs steadily with lower management fees.
Common Questions
1. How are the fees for discretionary investment management calculated?
Answer: Typically, the fees for discretionary investment management include a management fee and a performance fee. The management fee is fixed, while the performance fee is based on the portfolio's performance.
2. How to choose the right investment manager?
Answer: When choosing an investment manager, consider their professional qualifications, past performance, investment strategy, and risk management capabilities.
