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What is Discretionary Investment Management?

1142 reads · Last updated: December 5, 2024

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).

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' refers to the investment decisions being made at the discretion of the portfolio manager, meaning the client must have full trust in the manager's abilities.

Origin

The concept of discretionary investment management originated in the mid-20th century as financial markets became more complex, prompting investors to seek professionals to manage their portfolios. Over time, this form of management evolved to become a crucial part of the modern investment management industry.

Categories and Features

Discretionary investment management can be categorized into active and passive management. In active management, investment managers actively seek market opportunities to outperform the market, while passive management typically involves tracking market indices. Features of discretionary investment management include a high level of expertise, deep market understanding, and a strong focus on client objectives.

Case Studies

A typical case involves a large asset management firm providing discretionary investment management services to its high-net-worth clients. The firm, through its experienced investment team, leverages market insights and analytical skills to achieve long-term capital appreciation for its clients. Another case is a hedge fund manager who, through discretionary investment management strategies, successfully protected client assets during market volatility and achieved significant returns during market recovery.

Common Issues

Common issues investors face when choosing discretionary investment management include evaluating the manager's capabilities, ensuring investment strategies align with personal financial goals, and understanding the structure of management fees. Investors should carefully review the manager's track record and professional qualifications to ensure they meet their investment needs.

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