Discretionary Management Lytham St Annes

A key drawback to advisory services is that, while a manager will complete the investment transactions on your behalf, this can only be done after he or she has received your approval, either verbally or in writing. This can be a slow process as you may not be available when the manager tries to contact you and thus you may miss out on a short-term investment opportunity.

Streamlining the process

Discretionary management differs from execution-only and advisory because you hand over responsibility for the running of your portfolio to the investment manager. In practice, the manager can make buy and sell decisions without gaining your prior approval.

Discretionary management is the most suitable service if you do not feel you have sufficient time or knowledge to manage your portfolio. The manager is empowered to make investment decisions on your behalf once he or she has established your objectives, risk profile and the length of time over which you want to achieve these goals. This is known as the “investment management agreement” (IMA). It ensures that the discretionary managed portfolio is tailored to your specific requirements and that the manager has drawn up the most appropriate asset allocation.

The IMA sets out your objectives, the time frame within which you expect to meet them, your risk profile, the asset allocation, any investment preferences, constraints over the type of stocks, sectors and funds that can be included in your portfolio, currencies to be used, benchmarks against which to measure the performance of your portfolio and how ongoing reviews and reporting will be conducted.

Setting the benchmark

Choosing an appropriate benchmark is important as it helps you to evaluate whether the discretionary manager is meeting your goals within the risk profile and investment constraints agreed. The benchmark may be an existing index, such as the FTSE All-Share, or a tailored benchmark that includes all the asset classes within your portfolio, or cash.

Managers have different ways of establishing your risk profile, with many using a questionnaire. The manager may establish your risk profile by determining the largest negative returns you will tolerate over different time periods.

Traditionally, stockbrokers’ discretionary services used a mix of equities, fixed-interest and cash in portfolios. But increasingly managers have expanded their service to include alternative investments like property, hedge funds, structured products and private equity. You should check which asset classes managers use and how they rate the risk level of each of them.

A mix of assets

Typically, managers use a mixture of individual securities as well as collective funds. The way in which these are used does vary, however. Most will use single equities for the UK portion of your portfolio. For overseas equities and other asset classes, many managers will opt for collective investments.

The proportion devoted to individual securities partly ...

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