Discretionary Investment Management: Definition, Benefits, and Real-Life Cases


Discretionary investment management is a sophisticated approach in which portfolio managers or investment counselors make buy and sell decisions for their clients. this article explores the definition, benefits, risks, and workings of discretionary investment management. it also delves into the qualifications of managers and the alignment of interests with clients. whether you’re a high-net-worth individual or an institutional investor, understanding the ins and outs of discretionary management can help you make informed financial decisions.

What is discretionary investment management?

Discretionary investment management is a professional service that caters to high-net-worth individuals and institutional investors. it involves portfolio managers or investment counselors making buy and sell decisions on behalf of clients. these decisions are made at the discretion of the manager, hence the term “discretionary.” clients must have full confidence in the manager’s expertise, as their investments are entirely in the hands of these professionals.

Qualifications of discretionary managers

individuals who offer discretionary investment management typically possess advanced educational credentials and extensive experience in the investment industry. many hold prestigious professional designations such as chartered financial analyst (CFA), chartered alternative investment analyst (CAIA), chartered market technician (CMT), or financial risk manager (FRM). these qualifications ensure that they are well-equipped to handle clients’ investments competently.

Understanding discretionary investment management

services provided under discretionary investment management are tailored to high-net-worth individuals and institutional investors. these accounts often come with a minimum investment requirement, frequently starting at $250,000. the investment manager’s strategy involves the purchase of various securities that align with the client’s risk profile and financial goals. these securities may include stocks, bonds, ETFs, and financial derivatives.

discretionary investment managers employ a systematic approach, grouping clients based on their goals and risk tolerance. investments are not customized for individual clients but are made according to the strategies of each group. the client accounts remain segregated, with funds allocated proportionally based on the capital investments of each individual.

for example, in a portfolio with an initial capital of $10 million, a high-net-worth individual contributing $1 million will hold a 10% stake in the portfolio, while another contributing $300,000 will have a 3% stake.

Benefits of discretionary management

discretionary investment management offers numerous advantages to clients. it relieves them of the daily burden of making investment decisions, which are instead entrusted to a qualified portfolio manager who is well-versed in the intricacies of the market. this delegation allows clients to focus on other important aspects of their lives.

additionally, discretionary management aligns the interests of the investment manager with those of the client. managers typically charge a percentage of the assets under administration as their management fee. if the portfolio grows under their stewardship, they receive a higher management fee. this eliminates the temptation to excessively trade accounts to generate more commissions, a flaw in the transaction-based investment model.

furthermore, clients in discretionary accounts may benefit from better investment opportunities and more favorable trade execution prices. portfolio managers can place single buy or sell orders for multiple clients, increasing efficiency and cost-effectiveness. when market downturns present buying opportunities, portfolio managers can quickly seize them, ensuring clients don’t miss out on quality stocks temporarily dropping in value.

Risks of discretionary management

while discretionary investment management offers substantial benefits, it’s not without drawbacks. the high minimum account balance and associated fees can be significant obstacles, especially for new investors with limited funds. such individuals may not be able to access this style of investment.

from the client’s perspective, there must be confidence in the competence, integrity, and trustworthiness of the portfolio manager. it’s essential for clients to conduct thorough due diligence on potential managers before entrusting them with their life savings. there’s a risk of entrusting money to a manager who lacks integrity or doesn’t consider the client’s stated goals seriously.

Real-world examples of discretionary investment management

many real-world scenarios demonstrate the practical applications of discretionary investment management. let’s explore a few examples that highlight the versatility and advantages of this approach.

1. Case study: The Johnson family portfolio

the Johnson family, a high-net-worth client, sought the services of a discretionary investment manager to oversee their substantial investment portfolio. with assets totaling $5 million, they wanted a hands-off approach that would allow them to enjoy the benefits of professional management while focusing on their busy careers and family life.

their portfolio manager, with a CFA designation and years of experience, crafted a customized strategy that aligned with the Johnsons’ goals and risk tolerance. the Johnsons’ investments included a mix of stocks, bonds, and ETFs. as the portfolio grew, the management fee for the manager increased, ensuring their interests were aligned.

this case study exemplifies how discretionary investment management can benefit high-net-worth individuals by providing professional oversight and growth opportunities for their investments.

2. Institutional investor’s approach: ABC pension fund

institutional investors like pension funds also find value in discretionary investment management. take the ABC pension fund, with billions in assets to manage. their focus is on securing the financial well-being of their plan participants.

a team of experienced managers, each holding relevant professional designations, is responsible for overseeing the fund’s investments. by grouping participants based on their investment goals and risk profiles, the managers efficiently allocate resources. this ensures that the fund’s capital is invested according to the strategies defined for each group.

the ABC pension fund’s experience showcases how discretionary investment management is tailored to the specific needs of institutional investors and their fiduciary responsibilities.

Advanced strategies in discretionary management

while the core principles of discretionary investment management remain consistent, advanced strategies can be employed to achieve even greater results. let’s explore a couple of these strategies that take discretionary management to the next level.

1. Tactical asset allocation

tactical asset allocation is a strategy used by experienced discretionary managers to take advantage of short-term market opportunities. in this approach, portfolio managers may temporarily overweight or underweight certain asset classes based on their market outlook. for instance, they might increase exposure to technology stocks during a tech sector boom.

this dynamic strategy allows managers to capture gains during favorable market conditions and reduce risks during downturns. however, it requires a deep understanding of market trends and economic indicators.

2. Tax-efficient portfolio management

discretionary managers can implement tax-efficient strategies to optimize returns and minimize tax liabilities. they achieve this by considering factors such as tax-loss harvesting, capital gains management, and asset location. these strategies can lead to significant tax savings for clients, especially those in higher tax brackets.

by implementing tax-efficient portfolio management, discretionary managers provide added value to their clients by enhancing after-tax returns while ensuring tax compliance.


the expanded article now encompasses real-world examples that illustrate the benefits of discretionary investment management for both high-net-worth individuals and institutional investors. we also explored advanced strategies that can be employed to enhance the effectiveness of discretionary management, such as tactical asset allocation and tax-efficient portfolio management.

understanding how these strategies work and their practical applications can empower clients to make informed decisions about their financial future. whether you’re an individual with substantial assets or part of an institutional investor, discretionary management offers a range of advantages when handled by competent professionals.

Frequently asked questions

What is the minimum investment requirement for discretionary investment management?

The minimum investment requirement for discretionary investment management typically starts at $250,000. This threshold may vary among different firms and portfolio managers.

How are investments customized to individual clients in discretionary management?

In discretionary investment management, investments are not customized for individual clients. Instead, portfolio managers group clients based on their goals and risk tolerance, and investments are made according to the strategies defined for each group.

What qualifications do discretionary managers typically possess?

Discretionary managers typically hold advanced educational credentials and have extensive experience in the investment industry. Many of them possess professional designations such as Chartered Financial Analyst (CFA), Chartered Alternative Investment Analyst (CAIA), Chartered Market Technician (CMT), or Financial Risk Manager (FRM).

What are the risks associated with discretionary investment management?

The risks of discretionary investment management include the high minimum account balance, which can be a barrier for new investors with limited funds. Additionally, clients need to have confidence in the competence and integrity of the portfolio manager and should conduct due diligence before entrusting their assets.

How do discretionary managers align their interests with clients?

Discretionary managers typically charge a percentage of the assets under administration as their management fee. This fee structure aligns the manager’s interests with those of the client, as they benefit when the portfolio grows. This reduces the temptation to engage in excessive trading for commissions.


discretionary investment management is a specialized service designed to cater to the unique needs of high-net-worth individuals and institutional investors. by delegating investment decisions to experienced professionals, clients can focus on other aspects of their financial lives. this approach aligns the interests of both the client and the manager, promoting responsible and diligent management of assets. however, potential clients should be aware of the high minimum investment requirements and conduct thorough due diligence to ensure they entrust their financial well-being to a reputable and trustworthy portfolio manager. understanding the ins and outs of discretionary management can empower individuals to make informed financial decisions that align with their goals and risk tolerance.

Key takeaways

  • discretionary investment management involves portfolio managers making buy and sell decisions for clients at their discretion.
  • clients benefit from the expertise of qualified professionals and are relieved of the burden of making daily investment decisions.
  • the alignment of interests between the manager and the client minimizes the temptation to generate excessive commissions.
  • risks include high minimum account balances and the need for trust in the manager’s competence and integrity.

Article sources

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