In the aftermath of 2008-09, many investors have opted for discretionary portfolio management services. According to the Investor Economics spring 2011 report, adviser-managed programs grew 9.2% for the quarter and 30.5% year-over-year with assets increasing to $52.4 billion from $40.1 billion as of March 2011.
With discretionary accounts, investors delegate day-to-day investment decisions to their portfolio manager (PM). That differs from non-discretionary accounts where clients must make final trading decisions. In a fast-paced financial world, delegation makes a difference.
Consider an adviser with a hundred clients in non-discretionary accounts, each holding a particular stock. Should the markets take a turn for the worse or the company post unfavourable results, the adviser must contact each of those clients for approval to sell the position.
This can be a serious disadvantage when a situation warrants immediate action. Think about Sino Forest Corp. The company dropped from $18.05 to $4.81 in only two days following an extremely negative research report.
For clients in discretionary accounts, portfolio managers can act on available information quickly and efficiently, selling the position out of all their accounts in a single, cost-effective transaction. Likewise, the portfolio manager is better positioned to seize buying opportunities. When the markets dip and a good quality stock inexplicably drops in value, he or she can again act immediately.
Discretionary management can be particularly useful for profit taking. Many investors find it easy to buy positions, but difficult to sell when the time is right to pull the trigger. A good portfolio manager takes emotion out of the equation by making the decision for the client.
The portfolio manager doesn?t invest without restriction, but is bound by the parameters outlined in a jointly developed investment policy statement. Investors may even establish constraints based on such things as personal principles and specify stocks to avoid from industries they feel are socially undesirable. The investor has more peace of mind knowing that discretionary accounts are subject to greater governance and oversight by the investment firm.
Discretionary accounts are cost effective because most come with fewer fees than mutual funds. Fees are usually based on assets under administration, which motivates portfolio managers to perform well because their fees are linked to portfolio performance. Fees are generally tax deductible in non-registered accounts.
But for some investors, discretionary accounts aren?t suitable. They enjoy being more hands-on with their investing and like being a part of the decision-making process. Others have such complex constraints on their portfolios that discretionary management isn?t possible.
Discretionary accounts are ideal for investors, such as busy executives, business owners and others who don?t want to be involved with portfolio management. These accounts are most suitable for investors who prefer a balanced approach to investing and have a long time horizon. Discretionary accounts usually have higher minimum investment requirements, often starting at $250,000.
The qualifications to be a portfolio manager naturally require higher levels of education and experience than other advisers. However, when choosing a portfolio manager, investors should seek even more distinctions, including access to high quality research and freedom from any influence toward proprietary products. The portfolio manager should have a clear communications plan and be readily available to answer clients? questions. ?