Discretionary investment management: Difference between revisions

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Discretionary investment management is a form of professional investment management in which investments are made on behalf of clients through a variety of securities. The term "discretionary" refers to investment decisions being made by the investment manager based on the investment manager's judgement rather than under the direction of the client. The major aim of the services offered is to outperform benchmarks listed in the mandate; this is called providing alpha.

The services provided are usually tailored for institutional business, pension funds and high-net worth individuals. The investment management company has a continuous responsibility to ensure that an investment portfolio is suitable for the client's attitude to risk and investment objectives.^[1]

Investment products

Discretionary investment managers may manage investments in any type of securities, according to the investment manager's strategy. The most common investment products are stocks, bonds, ETFs and financial derivatives. All the investment products in the scope of the investment manager's strategy must be outlined in an investment mandate.^{[citation needed]}

Investment process

Due to the nature of the service, discretionary investment management firms provide a mandate in order to ensure that the services that are offered meet the aims of the client's financial goals.

The process is structured in a way for the client's capital to be invested according to the strategies specified in the investment mandate. Clients choosing a specific strategy will get the same strategy – there is no investment tailoring for the specific client, and the investment capital from a group of investors will be invested at the same time, as in a mutual fund or hedge fund, although each actual client account is segregated and the monies invested will be weighted in proportion to the individual's capital. For example, the investment manager may make a decision to invest 1% of invested funds in a particular security, so a £10,000,000 account will contribute £100,000 to the transaction whilst a £1,000,000 account will contribute £10,000.^[2]

Investment management fees

Investment management fees can include:

Assets under management (AUM) fees: Most discretionary investment management companies charge an assets under management (AUM) fee, typically at an annual rate of 0.1%–4% of the value of the managed asset portfolio.^[3]
Transaction fees: In addition to an AUM fee, a fee may be charged when executing transactions.
Performance fees (as a percentage of profits): This is a fee charged as a share of the profit generated for the client, usually 10%–30% of the profits. With this type of fee, the client does not need to pay when the fund is losing money.^[4]

In the United Kingdom

In the UK, the regulatory authority for discretionary investment management companies is the Financial Conduct Authority. Investment managers are required to have a graduate degree or an investment qualification such as the Chartered Financial Analyst designation (CFA).

References

^ "Wealth management". 16 March 2016. Retrieved 2016-08-12.
^ "What is Discretionary Fund Management". defaqto.com. Retrieved 2016-08-12.
^ root (23 November 2003). "Management Fee Definition". Investopedia. Retrieved 2016-08-12.
^ "High Water Mark Definition from Financial Times Lexicon". lexicon.ft.com. Retrieved 2016-08-16.

[1] "Wealth management". 16 March 2016. Retrieved 2016-08-12.

[2] "What is Discretionary Fund Management". defaqto.com. Retrieved 2016-08-12.

[3] root (23 November 2003). "Management Fee Definition". Investopedia. Retrieved 2016-08-12.

[4] "High Water Mark Definition from Financial Times Lexicon". lexicon.ft.com. Retrieved 2016-08-16.

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+{{short description|Form of professional investment management}}
-'''Discretionary investment management''' is a form of professional [[investment management]] investments are made on behalf of clients through a variety of [[Security (finance)|securities]]. The term "discretionary" refers to investment decisions being made by the investment manager based on the investment manager's judgement rather than under the direction of the client. The major aim of the services offered is to outperform benchmarks listed in the mandate; this is called providing [[Alpha (finance)|alpha]].
+'''Discretionary investment management''' is a form of professional [[investment management]] in which investments are made on behalf of clients through a variety of [[Security (finance)|securities]]. The term "discretionary" refers to investment decisions being made by the investment manager based on the investment manager's judgement rather than under the direction of the client. The major aim of the services offered is to outperform benchmarks listed in the mandate; this is called providing [[Alpha (finance)|alpha]].
-The services provided are usually tailored for [[Financial institution|institutional]] business, [[pension fund]]s and [[High-net-worth individual|high-net worth individuals]]. The investment management company has a continuing responsibility to ensure that an investment portfolio is suitable for the client's attitude to risk and investment objectives.<ref>{{Cite web|url=https://www.the-fca.org.uk/consumers/wealth-management|title=Wealth management|date=16 March 2016|access-date=2016-08-12}}</ref>
+The services provided are usually tailored for [[Financial institution|institutional]] business, [[pension fund]]s and [[High-net-worth individual|high-net worth individuals]]. The investment management company has a continuous responsibility to ensure that an investment portfolio is suitable for the client's attitude to risk and investment objectives.<ref>{{Cite web|url=https://www.the-fca.org.uk/consumers/wealth-management|title=Wealth management|date=16 March 2016|access-date=2016-08-12}}</ref>
 == Investment products ==
@@ Line 7: / Line 8: @@
 == Investment process ==
-Due to the nature of the service, discretionary investment management firms provide a mandate in order to ensure that the services offered meet the aims of the client's financial goals.
+Due to the nature of the service, discretionary investment management firms provide a mandate in order to ensure that the services that are offered meet the aims of the client's financial goals.
-The process is structured in a way for clients capital to be invested in the specified strategies in the investment mandate. Clients choosing a specific strategy will get the same strategy – there is no investment tailoring for the client. This means clients monies will be pooled together and invested at the same time. The actual client account is segregated and the monies invested will be weighted to the individuals capital. E.g) 1% investment in a £10,000,000 account will contribute £100,000 to the transaction whilst a £1,000,000 will contribute £10,000.<ref>{{Cite web|url=http://defaqto.com/advisers/zones/dfm-zone/features/What-is-Discretionary-Fund-Management/|title=What is Discretionary Fund Management|website=defaqto.com|access-date=2016-08-12}}</ref>
+The process is structured in a way for the client's capital to be invested according to the strategies specified in the investment mandate. Clients choosing a specific strategy will get the same strategy – there is no investment tailoring for the specific client, and the investment capital from a group of investors will be invested at the same time, as in a [[mutual fund]] or [[hedge fund]], although each actual client account is segregated and the monies invested will be weighted in proportion to the individual's capital. For example, the investment manager may make a decision to invest 1% of invested funds in a particular security, so a £10,000,000 account will contribute £100,000 to the transaction whilst a £1,000,000 account will contribute £10,000.<ref>{{Cite web|url=http://defaqto.com/advisers/zones/dfm-zone/features/What-is-Discretionary-Fund-Management/|title=What is Discretionary Fund Management|website=defaqto.com|access-date=2016-08-12}}</ref>
-The most common process you will encounter is using a systematic approach which is important for investment managers to demonstrate their strategies and will help you understand their decisions better.<ref>{{Cite web|url=https://www.alphaseekerim.com/insights-what-is-the-difference-between-discretionary-investment-management-and-advisory-services/|title= What is the difference between discretionary investment management and advisory services|website=alphaseekerim.com|date=31 March 2016|language=en-GB|access-date=2016-08-12}}</ref> This process is widely used because it allows the investment strategies to be exercised in a specific way and makes it easier to report results.
 == Investment management fees ==
@@ Line 20: / Line 19: @@
 == In the United Kingdom ==
-In the UK, the regulatory authority for discretionary investment management companies is the [[Financial Conduct Authority]], and investment managers are required to have a graduate degree or an investment qualification such as the [[Chartered Financial Analyst]] designation (CFA).
+In the UK, the regulatory authority for discretionary investment management companies is the [[Financial Conduct Authority]]. Investment managers are required to have a graduate degree or an investment qualification such as the [[Chartered Financial Analyst]] designation (CFA).
 == See also ==