Discretionary Investment Management is a form of professional investment management that invests on behalf of their clients through a variety of securities. The term “discretionary” refers to the fact that investment decisions are made at the investment manager’s judgement. The major aim of the services offered is to outperform benchmarks listed in the mandate; this is called providing alpha.
The services provided are usually tailored for institutional business, pension funds and high-net worth individuals. The investment management company has a continuing responsibility to ensure that an investment portfolio is suitable for the client’s attitude to risk and investment objectives.
Discretionary Investment Managers have access to every security in the market place. It is up to the investment manager’s strategy to decide what securities best fit in a client’s portfolio. The most common investment products are stocks, bonds, ETFs and financial derivatives. All the investment products in the scope of the investment manager’s strategy must be outlined in the investment mandate.
Due to the nature of the service, discretionary investment management firms provide a mandate in order to ensure that the services offered meet the aims of the client’s financial goals.
The process is structured in a way for clients capital to be invested in the specified strategies in the investment mandate. Clients choosing a specific strategy will get the same strategy – there is no investment tailoring for the client. This means clients monies will be pooled together and invested at the same time. The actual client account is segregated and the monies invested will be weighted to the individuals capital. E.g) 1% investment in a £10,000,000 account will contribute £100,000 to the transaction whilst a £1,000,000 will contribute £10,000.
The most common process you will encounter is using a systematic approach which is important for investment managers to demonstrate their strategies and will help you understand their decisions better. This process is widely used because it allows the investment strategies to be exercised in a specific way and makes it easier to report results.
Investment Management Fees
Assets Under Management Fees
Most discretionary investment management companies charge an assets under management (AUM) fee. This is to keep the companies interests aligned with their investors. The more they grow the assets under management, the more they’ll receive from the AUM fee. The fee can range from anything between 0.1%-4% AUM.
In addition to an AUM fee, a transactional fee is another type of fee provided by investment managers. This is a fee that is charged every time the investment manager makes a transaction on your behalf. This can vary between 0.01%-0.5% of the amount invested.
High-Water Mark Fees (% of Profits)
A more attractive fee is when a company receives a share of the profits generated for their clients. This usually ranges between 10% – 30% of the profits. The high-water mark is used to prevent clients from paying when the fund is performing poorly, or below their mandate. See more about performance fees
Investment managers require a graduate degree or an investment qualification such as the Chartered Financial Analyst designation (CFA).
Discretionary investment management companies are under strict regulations in their respected countries, most notably the FCA in the UK.
The Financial Conduct Authority is the conduct regulator for 56,000 financial services firms and financial markets in the UK and the prudential regulator for over 24,000 of those firms. Financial Regulations for more info.
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Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.