A couple talks to their investment advisor or wealth manager

Do you need a discretionary investment manager?

What kind of professional advice is right for you? It all depends on how hands-on you want to be…

If you’re seeking professional help with your investments, you may need to choose between advisory and discretionary management. In a recent post, we explored the differences between the two. Now, we examine the relative merits in greater depth.

Discretionary management

Advantages

This option allows the client to sit back and let a professional investment team do all the work. A discretionary fund manager has authority to make changes to the portfolio. That way, there’s no need for the client to consider and approve every purchase or sale. Decisions are made within parameters already agreed.
This allows for a more dynamic investment strategy. Switches can be made in a timely fashion, without the time and paperwork involved in seeking approval. This is particularly important in turbulent markets. Immediate execution of orders means that managers can more effectively reduce the impact of falling markets.
Discretionary managers are required to have a high level of professional qualification, and can offer a greater depth of specialist investment knowledge.
This level of professional qualification allows discretionary managers to invest in a wider range of financial products. They may invest across the board, in trusts, exchange-traded funds (ETFs), fixed income securities, equities and currency.
A discretionary manager can invest directly in the market instead of through an intermediary. This means that transaction fees are far lower. As a result, buying and selling can happen on a more regular basis, without transaction costs greatly reducing the value of the portfolio.
For the reasons listed above, a discretionary portfolio can be managed in a more dynamic way than an advisory one. A discretionary manager is constantly monitoring investments and making changes. An IFA, for example, might only review investments periodically.

Disadvantages

Although the discretionary manager has a clear mandate from the client on the investment approach to take, the client is not involved in day-to-day decision making. Many people prefer this, but it may not suit someone with a keen interest in investment who has time to consider investments on an individual basis.
Fees for discretionary management tend to be higher – though the client can reasonably hope for better overall returns from a portfolio managed on a discretionary basis.
Discretionary investment is often the next step up as a client acquires more capital, but he or she may already have a good relationship with a trusted advisor not able to offer this service.

Advisory management

Advantages

For clients who have the time and interest in investment, advisory management offers a way of being more involved in the process. The investment advisor will always seek approval before buying or selling. In practice, many clients simply accept recommendations, but they still retain control.
Clients have the opportunity to veto particular products or sectors they may not wish to invest in.
Fees tend to be lower, though this is not always the case.

Disadvantages

The process of seeking approval for switching investments is time consuming and costly. As a result, investments may not be bought and sold at the optimum time – especially in a fast-moving market.
Clients tend to meet with their advisor on a periodic basis, whether annually, half yearly or quarterly, to review portfolios. It may be that investments are not reviewed between these times. Under discretionary management, portfolios are constantly under review.
It is likely that an advisory manager has a smaller range of financial products available for clients to invest in. In fact, financial advisors are increasingly outsourcing portfolios to discretionary managers due to the specialist nature of investment management and the perceived risks of non-managed investments.