What is discretionary investment management?
Discretionary investment management is the buying and selling of investments on your behalf by a licensed Portfolio Manager who is granted authority to undertake trades without the need for prior client consent. You and your portfolio manager (PM) develop an Investment Policy Statement (IPS) when you begin working together, which is an agreement that confirms your overall financial goals, risk tolerance and investment objectives, and defines the boundaries on how your portfolio will be managed. The PM then creates a diversified portfolio that reflects your financial situation and proactively makes portfolio management decisions to manage your portfolio on a day to day basis. You receive periodic reports of your portfolio’s value, transactions, and performance.
What is a Portfolio Manager?
Portfolio Managers are highly trained, qualified and experienced professionals who provide overall financial guidance, and help build and maintain your portfolio, by implementing investment decisions on your behalf. They typically have advanced investment qualifications such as the Chartered Financial Analyst or Canadian Investment Manager designation. Firms that offer discretionary investment management services must also implement strict policies and procedures designed to protect investors and supervise portfolio management activities and accounts.
All Portfolio Managers have a fiduciary duty to you, which means they are legally and professionally required to always act in your best interests. This requirement goes beyond ensuring that investments are suitable for you, which is all that’s required of other types of financial advisors. Because of their fiduciary duty, Portfolio Managers do not receive commission on investment products they sell to you. Rather, they charge based on a percentage of your portfolio’s value (usually 1–2%), so you don’t have to wonder if your manager is recommending an investment because it pays an attractive commission.
Portfolio Managers often require that you have at least $500,000 to invest before working with you.
What are the benefits of discretionary management?
With discretionary management by a licensed Portfolio Manager, you may be able to participate in investments that you wouldn’t have easy access to on your own because some types of investments, chiefly private equity and other alternative investments, can be purchased only by Accredited Investors. To qualify as an Accredited Investor, you must have a net worth of over $5 million, greater than $1 million in investible financial assets, or a net income of at least $200,000 per year for an individual ($300,000 for a couple). As many investors do not meet this test, Portfolio Managers acting on behalf of a discretionary managed account are able to provide access.
Another benefit of working with a Portfolio Manager using discretionary management is that the cost will be lower than using other types of investment management. And because Portfolio Managers charge a percentage of your portfolio value, rather than commissions or transaction fees, the fees are fully transparent.
Discretionary management is convenient. Because the Portfolio Manager doesn’t have to spend time trying to get ahold of you before every transaction, they can act quickly and efficiently as investment and profit-taking opportunities arise. Sometimes the best opportunities are short-lived.
If you don’t want to think about your portfolio every day and would rather let an expert deal with it, discretionary management might be right for you. Talk with a qualified Portfolio Manager to find out.