Discretionary Investment Management: Definition, Benefits, Risks & Services What it is Discretionary investment management is a service in which a professional portfolio manager is authorized to make buy and sell decisions on a client’s behalf without obtaining approval for each transaction. The client and manager agree upfront on an investment strategy, risk tolerance, and objectives; the manager then implements and adjusts the portfolio to meet those parameters. Explore More Resources
How it works
* Agreement: The client and manager set objectives, constraints, and risk tolerance.
* Authority: The manager receives discretion to execute trades within the agreed framework.
* Implementation: Managers may pool client funds into model or collective portfolios while maintaining segregated client accounts; each client’s holdings are weighted according to their contribution.
* Instruments: Managers typically use stocks, bonds, ETFs, and sometimes derivatives to construct portfolios.
* Reporting: Managers provide periodic statements and performance reporting aligned with the agreed strategy.
Who typically uses it Discretionary services are most common among high-net-worth individuals and institutional investors. Minimum investment requirements often apply (commonly in the hundreds of thousands of dollars, but amounts vary). Key benefits
* Time savings: Clients avoid day-to-day decision making and market monitoring.
* Professional expertise: Access to experienced portfolio managers and research.
* Fee alignment: Managers usually charge a percentage of assets under management (AUM), aligning their incentives with portfolio growth rather than transaction volume.
* Execution efficiency: Aggregated orders can yield better pricing and lower transaction costs; managers can act quickly across accounts to seize market opportunities.
* Access: Clients may gain access to investment opportunities or strategies not available to retail investors.
Main risks and drawbacks
* Cost and minimums: Management fees and account minimums can be high, limiting accessibility for smaller investors.
* Manager risk: Clients must trust the manager’s competence and integrity; poor decisions or misconduct can harm returns.
* Reduced control: Clients cede day-to-day control over individual trades and may not have bespoke customization beyond agreed constraints.
* Due diligence required: Selecting a reliable manager demands careful vetting of track record, credentials, fee structure, and compliance history.
Choosing a manager — practical steps
* Verify credentials and regulatory records.
* Review historical performance, investment process, and risk management practices.
* Understand all fees (AUM fees, performance fees, trading costs) and any conflicts of interest.
* Confirm reporting frequency, communication expectations, and how customization or constraints are handled.
* Ask for references and examples of how similar client needs are managed.
Key takeaways
* Discretionary management delegates trading authority to a professional within agreed risk and objective parameters.
* It suits investors who want professional management, efficient execution, and are able to meet minimums and fees.
* The approach can improve efficiency and align incentives but requires trust and careful selection of the manager.