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discretionary investment management

Investing isn’t always easy. The decision to buy or sell a specific security requires research, time and the knowledge on how to make a trade. That’s why some people are happy to pass off the work to a wealth manager or financial advisor who is an investing expert. A type of investing where an advisor makes decisions on a client’s behalf is called discretionary investment management. Removing yourself from the management of your account is a big decision, though. So before you find a financial advisor to invest with, let’s see if discretionary investment management is something you should consider.

What Is Discretionary Investment Management?

Discretionary investment management is a type of investment management where a wealth manager or other financial advisor makes all the buying and selling decisions for a client’s portfolio. In other words, the management decisions of the portfolio are at the discretion of the manager. However, the manager will make all investment decisions according to a plan that the client has agreed to and signed.

Any financial advisor could offer discretionary accounts. Discretionary investment management does not imply a specific type of advisor. It is simply a type of management. While any investor could use discretionary management, investors are typically high-net-worth individuals, pension funds, organizations and other institutional investors.

Discretionary accounts are often actively managed. That means the wealth manager is regularly buying and selling stock in an attempt to maximize stock market gains. While it’s possible for a wealth manager to use a more passive approach, a client will make relatively few transactions when investing passively. That makes the idea of discretionary management less appealing to some investors.

Unlike portfolios in most financial advisor relationships, wealth managers typically use a systematic group approach for discretionary funds. Instead of making investing decisions based on individual clients, managers will choose some securities in which to invest all client funds in. How an individual client invests in those securities will depend on how much the client is willing to invest and the client’s individual risk tolerance.

The Cost of Discretionary Investment Management

As mentioned, many of the clients who use discretionary investment management are high-net-worth individuals. Discretionary management often carries high minimums of $250,000 or more. However, the individual wealth manager will set the minimum so it may be possible to invest if you have less.

Wealth managers of discretionary accounts get paid a percentage of a client’s assets under management (AUM). The exact fee will depend on the specific advisor. However, you can generally expect to pay at least 2% of your AUM. Some advisors may also charge additional fees. These fees may sound high, but they’re not that different from what financial advisors typically make.

Why to Use Discretionary Investment Management

discretionary investment management

The biggest reason to use discretionary investment management is the simplicity of it. You don’t have to worry about any of the day-to-day decision-making. You don’t need to spend hours researching company backgrounds or comparing mutual funds. While you can certainly learn the basics of investing, the best way to invest hundreds of thousands of dollars isn’t always clear.

Why Not to Use Discretionary Investment Management

For many investors, the account minimums and fees will make discretionary fund management too expensive. If you’re just starting to invest and don’t have much to get started, you should consider other options. You may even want to consider something like a robo-advisor, which generally has low fees and account minimums.

If you can afford the cost, you should also consider your investing goals. Discretionary management typically takes an active investing approach that aims to maximize gains. This may not be the best approach for you if you’re looking to invest for your upcoming retirement. At the same time, your wealth manager will tailor your exact investing strategy to your needs and goals. Make sure you completely understand all investing plans before agreeing to them.

Ultimately, discretionary management comes down to trust. It requires you to place faith in your wealth advisor that he or she will handle your funds appropriately. You have to agree to any investing plans but your manager will have freedom to make the day-to-day decisions. Do your research to ensure you’re working with a reputable firm. Look for advisors who have registered with the SEC, because they will have a fiduciary duty to act in your best interests.

The Takeaway

discretionary investment management

Discretionary investment management is a type of investment management that takes the day-to-day decision making out of your hands. Instead, a wealth manager or other financial advisor handles your investments according to a plan that you have agreed to. Naturally, this requires you to trust someone else with your finances. The exact fees you pay will depend on who you work with and how you invest your money, but you can generally expect to pay at least 2% of your AUM.

Nowadays, especially with the rise of robo-advisors, there are cheaper investing options. They may not give you same experience though, so make sure to weigh all your options. If you’re unsure what’s best for you, it’s a good idea to talk with an advisor to go over your (or to create your) financial plan.

Tips for Investing

  • The “best” way to invest depends on your individual situation and your specific goals. If you aren’t sure what your investing goals are, a good way to start is by creating a financial plan.
  • Financial advisors are professionals who have studied and worked with financial planning and investing. The kind of advisor you work with will depend on what you want to do. For example, you may want someone specifically to help you with a complicated tax situation. No matter what type of advisor you’re looking for, we can match you with a qualified advisor who meets your needs through our financial advisor matching tool. Simply answer a short questionnaire and we will do the rest for you.
  • If you’re interested in a more passive and long-term investing approach, consider a robo-advisor. Robo-advisors are significantly cheaper than traditional financial advisors. They have also designed to imitate the strategies of some of the most successful investors.

Photo credits: ©iStock.com/Weekend Images Inc., ©iStock.com/sturti, ©iStock.com/andresr

Derek Silva, CEPF® Derek Silva is determined to make personal finance accessible to everyone. He writes on a variety of personal finance topics for SmartAsset, serving as a retirement and credit card expert. Derek is a member of the Society for Advancing Business Editing and Writing and a Certified Educator in Personal Finance® (CEPF®). He has a degree from the University of Massachusetts Amherst and has spent time as an English language teacher in the Portuguese autonomous region of the Azores. The message Derek hopes people take away from his writing is, “Don’t forget that money is just a tool to help you reach your goals and live the lifestyle you want.”
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