Discretionary Investment Management: Definition, Benefits, Risks & Services

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.

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.