What is Discretionary Investment Management?

1003 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.

Suggested for You

Refresh

Switching Costs

Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers, or products. Although most prevalent switching costs are monetary in nature, there are also psychological, effort-based, and time-based switching costs. Switching can also refer to the process of rebalancing or changing investments.

Switching Costs

Switching costs are the costs that a consumer incurs as a result of changing brands, suppliers, or products. Although most prevalent switching costs are monetary in nature, there are also psychological, effort-based, and time-based switching costs. Switching can also refer to the process of rebalancing or changing investments.

Proprietary Trading

Proprietary trading refers to a financial firm or commercial bank that invests for direct market gain rather than earning commission dollars by trading on behalf of clients. Also known as "prop trading," this type of trading activity occurs when a financial firm chooses to profit from market activities rather than thin-margin commissions obtained through client trading activity. Proprietary trading may involve the trading of stocks, bonds, commodities, currencies, or other instruments.Financial firms or commercial banks that engage in proprietary trading believe they have a competitive advantage that will enable them to earn an annual return that exceeds index investing, bond yield appreciation, or other investment styles.

Proprietary Trading

Proprietary trading refers to a financial firm or commercial bank that invests for direct market gain rather than earning commission dollars by trading on behalf of clients. Also known as "prop trading," this type of trading activity occurs when a financial firm chooses to profit from market activities rather than thin-margin commissions obtained through client trading activity. Proprietary trading may involve the trading of stocks, bonds, commodities, currencies, or other instruments.Financial firms or commercial banks that engage in proprietary trading believe they have a competitive advantage that will enable them to earn an annual return that exceeds index investing, bond yield appreciation, or other investment styles.

Active Management

The term active management means that an investor, a professional money manager, or a team of professionals is tracking the performance of an investment portfolio and making buy, hold, and sell decisions about the assets in it. The goal of any investment manager is to outperform a designated benchmark while simultaneously accomplishing one or more additional goals such as managing risk, limiting tax consequences, or adhering to environmental, social, and governance (ESG) standards for investing. Active managers may differ from other is how they accomplish some of these goals.For example, active managers may rely on investment analysis, research, and forecasts, which can include quantitative tools, as well as their own judgment and experience in making decisions on which assets to buy and sell. Their approach may be strictly algorithmic, entirely discretionary, or somewhere in between.By contrast, passive management, sometimes known as indexing, follows simple rules that try to track an index or other benchmark by replicating it.

Active Management

The term active management means that an investor, a professional money manager, or a team of professionals is tracking the performance of an investment portfolio and making buy, hold, and sell decisions about the assets in it. The goal of any investment manager is to outperform a designated benchmark while simultaneously accomplishing one or more additional goals such as managing risk, limiting tax consequences, or adhering to environmental, social, and governance (ESG) standards for investing. Active managers may differ from other is how they accomplish some of these goals.For example, active managers may rely on investment analysis, research, and forecasts, which can include quantitative tools, as well as their own judgment and experience in making decisions on which assets to buy and sell. Their approach may be strictly algorithmic, entirely discretionary, or somewhere in between.By contrast, passive management, sometimes known as indexing, follows simple rules that try to track an index or other benchmark by replicating it.

A lead bank is a bank that oversees the arrangement of loan syndication. The lead bank receives an additional fee for this service, which involves recruiting the syndicate members and negotiating the financing terms. In the Eurobond market, the lead bank acts in an agent capacity for an underwriting syndicate.A lead bank is also known as a lead underwriter.

Lead Bank

A lead bank is a bank that oversees the arrangement of loan syndication. The lead bank receives an additional fee for this service, which involves recruiting the syndicate members and negotiating the financing terms. In the Eurobond market, the lead bank acts in an agent capacity for an underwriting syndicate.A lead bank is also known as a lead underwriter.

Periodic Interest Rate

A periodic interest rate is a rate that can be charged on a loan, or realized on an investment over a specific period of time. Lenders typically quote interest rates on an annual basis, but the interest compounds more frequently than annually in most cases. The periodic interest rate is the annual interest rate divided by the number of compounding periods.

Periodic Interest Rate

A periodic interest rate is a rate that can be charged on a loan, or realized on an investment over a specific period of time. Lenders typically quote interest rates on an annual basis, but the interest compounds more frequently than annually in most cases. The periodic interest rate is the annual interest rate divided by the number of compounding periods.

An index option is a financial derivative that gives the holder the right (but not the obligation) to buy or sell the value of an underlying index, such as the S&P 500 index, at the stated exercise price. No actual stocks are bought or sold. Often, an index option will utilize an index futures contract as its underlying asset.Index options are always cash-settled and are typically European-style options, meaning they settle only on the date of maturity and have no provision for early exercise.

Index Option

An index option is a financial derivative that gives the holder the right (but not the obligation) to buy or sell the value of an underlying index, such as the S&P 500 index, at the stated exercise price. No actual stocks are bought or sold. Often, an index option will utilize an index futures contract as its underlying asset.Index options are always cash-settled and are typically European-style options, meaning they settle only on the date of maturity and have no provision for early exercise.