Mitch McClean, March 22 2024

Understanding Discretionary Investment Accounts and Management

Unlocking the Potential of Professional Portfolio Management for Investors

The landscape of investing is vast and varied, with numerous approaches to managing and growing wealth. Among the myriad of strategies available to investors, discretionary investment accounts and management stand out for their hands-off approach, professional management, and potential to align closely with an investor's long-term financial goals. In this extensive guide, we delve into the world of discretionary investments and address some of the most common queries related to this investment strategy.

What is a Discretionary Investment Account?

A discretionary investment account is a type of investment account where the day-to-day decision-making responsibilities are handed over to a professional investment manager. The investor grants authority to the manager to make investment decisions—such as buying and selling securities, reallocating assets, and making strategic adjustments—without the need for prior approval from the investor for each transaction.

This delegation is not without bounds; it is governed by an agreed-upon set of guidelines and objectives, often detailed in an Investment Policy Statement (IPS). The IPS outlines the investor's goals, risk tolerance, time horizon, liquidity needs, and any other specific preferences or restrictions.

What is Discretionary Investment Management?

Discretionary investment management refers to the process and service through which investment professionals manage assets on behalf of their clients, operating under the discretion granted to them. This service encompasses a range of activities including research, selection, and ongoing monitoring of investments, as well as the execution of buy and sell orders.

Investment managers who offer this service are typically part of financial institutions, wealth management firms, or dedicated investment management companies. Their expertise lies in understanding the markets, identifying opportunities, and mitigating risks, all while aiming to achieve the best possible returns within the parameters of the client's IPS.

What Constitutes a Discretionary Investment?

A discretionary investment is any investment made by the manager within a discretionary account. These can include a variety of asset classes such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other financial instruments. The defining characteristic of a discretionary investment is not the asset itself, but the autonomy given to the manager in making the investment decision.

Who is a Discretionary Investment Manager?

A discretionary investment is any investment made by the manager within a discretionary account. These can include a variety of asset classes such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other financial instruments. The defining characteristic of a discretionary investment is not the asset itself, but the autonomy given to the manager in making the investment decision.

A discretionary investment manager is a licensed and often certified financial professional or entity with the authority to make investment decisions on behalf of clients. Managers can hold designations such as Chartered Financial Analyst (CFA), Chartered Investment Manager (CIM), or similar qualifications that showcase their expertise in financial analysis, strategy, and ethics.

The Role of Discretionary Investment in Modern Portfolios

Discretionary investment has become a cornerstone of modern portfolio management, particularly appealing to investors who lack the time, expertise, or desire to manage their investments actively. By entrusting their portfolio to a skilled manager, investors can benefit from:

Expertise: Access to seasoned professionals with a deep understanding of the markets.

Time Efficiency: More time to focus on personal or business interests, knowing their investments are in capable hands.

Strategic Agility: The ability to swiftly capitalize on market opportunities or pivot away from emerging risks.

Personalized Approach: Investment strategies that are tailored to the specific financial goals and risk profile of the investor.

Advantages of Discretionary Investment Management

Alignment of Interests: With a fee structure typically based on the assets under management (AUM), discretionary managers are incentivized to grow the client's portfolio since their compensation is directly tied to the account's performance.

Diversification: Professional managers have the tools and knowledge to diversify investments effectively, an essential component of managing risk.

Continuous Oversight: Discretionary accounts are monitored regularly, allowing for adjustments in response to market developments or changes in the client's circumstances.

Potential Drawbacks

Cost: Discretionary management often comes with higher fees compared to self-directed or advisory services, which may impact net returns.

Less Control: Investors must be comfortable relinquishing direct control over individual investment decisions.

Dependence on Manager's Skill: The success of the portfolio hinges significantly on the manager's competence and decision-making.

The Process of Establishing a Discretionary Investment Account

Initial Consultation: The investor and manager meet to discuss goals, risk tolerance, and other preferences.

Creating an IPS: A personalized investment policy statement is developed to guide the management of the account.

Account Setup: The investor opens an account and grants discretionary authority to the manager.

Portfolio Construction: The manager builds a portfolio in line with the IPS.

Ongoing Management: The manager continuously oversees the account, making decisions and adjustments as needed.

How Mitch McLean Wealth Creation Can Help You

Tailored Investment Strategies for Your Unique Financial Journey

At Mitch McLean Wealth Creation, we understand that your financial aspirations are as unique as your fingerprint. With this in mind, we offer bespoke investment solutions designed to cater to the individual nuances of your financial landscape. Our goal is to help you navigate the complex world of investing with ease and confidence, ensuring that your wealth not only grows but also works in harmony with your lifestyle and dreams.

Personalized Discretionary Investment Management

Mitch McLean is an experienced investment manager specializing in discretionary investment management, meaning we take the reins of your investment decisions while aligning closely with your predetermined goals and risk tolerance. We craft a tailored investment policy statement (IPS) that serves as a roadmap for all portfolio management decisions, ensuring transparency and a mutual understanding of the path ahead.

Expertise at Your Fingertips

Mitch McLean brings a wealth of knowledge and insight to your investment strategy. As a seasoned portfolio manager and chartered investment manager, Mitch is well-versed in market dynamics and equipped with the tools to identify and act upon growth opportunities while diligently managing risk.

A Proactive Approach to Wealth Management

We believe in a proactive, not reactive, approach to wealth management. By staying ahead of trends and adapting to market shifts, we strive to position your portfolio advantageously, anticipating rather than simply responding to changes.

Continuous Communication and Support

Our relationship with you is at the core of our service. We maintain an open line of communication, providing you with regular updates and insights into your investments. As a dedicated advisor, we will ensure you are well-informed and comfortable with the direction of your portfolio.

Regular Portfolio Reviews and Adjustments

The financial world never stands still, and neither do we. We conduct regular portfolio reviews to ensure your investments remain aligned with your evolving financial situation and life changes. During these reviews, we discuss performance, make necessary adjustments, and refine our strategies to keep your financial objectives in sight.

Transparent Fee Structure

We believe in straightforward, transparent fees. Our asset-based fee model aligns our success with yours, creating a partnership built on trust and mutual benefit. There are no hidden costs, so you can rest assured that your best interests are at the heart of what we do.

A Partner in Your Financial Success

Choosing Mitch McLean Wealth Creation means selecting a partner who is as invested in your financial success as you are. We take the time to understand your vision for the future and work tirelessly to help you build the wealth you need to realize that vision. Whether you're planning for retirement, looking to grow your assets, or seeking to preserve your wealth for future generations, our team is here to guide you every step of the way.

Frequently Asked Questions on Discretionary Investment

Q: What is a discretionary investment account?

A: A discretionary investment account is one where a professional investment manager has the authority to buy and sell securities without the client's express consent for each trade. The client sets the overall investment strategy, objectives, and risk tolerance, which the manager follows.

Q: How does discretionary investment management work?

A: Discretionary investment management involves entrusting your investment portfolio to a qualified manager who makes investment decisions on your behalf, within the parameters of an agreed-upon strategy. This includes selecting individual investments, managing assets, and reallocating funds as needed to align with market conditions and your investment goals.

Q: What are the benefits of a discretionary investment account?

A: The benefits include professional management of your investments, time savings since you are not making daily decisions, potential for personalized investment strategies, and quick reaction to market opportunities or risks by the manager.

Q: Who should consider a discretionary investment account?

A: Discretionary investment accounts are suitable for investors who lack the time, expertise, or interest to actively manage their investments and would prefer to have a professional handle their investment decisions.

Q: What is the difference between discretionary and advisory investment services?

A: Discretionary services provide a manager with the authority to make investment decisions without prior approval from the client, while advisory services involve providing advice and recommendations, with the client retaining the final decision-making power.

Q: Can I lose money in a discretionary investment account?

A: Yes, as with any investment, there is a risk of loss in a discretionary investment account. While professional managers aim to mitigate risks, there are no guarantees against losses in the market.

Q: How do I choose a discretionary investment manager?

A: Look for a manager with a strong track record, relevant credentials, a transparent fee structure, and an investment philosophy that aligns with your own. It's also important to assess the level of communication and reporting you can expect.

Q: What should be included in an Investment Policy Statement (IPS)?

A: An IPS should include the client's investment goals, risk tolerance, asset allocation strategy, investment constraints, liquidity requirements and guidelines on how the portfolio will be monitored and evaluated.

Q: How frequently will my discretionary investment portfolio be reviewed?

A: Review frequency can vary, but typically, a discretionary investment portfolio is monitored continuously with formal reviews conducted on a quarterly or semi-annual basis, or as significant market events occur.

Q: How are discretionary investment managers compensated?

A: Most discretionary investment managers are compensated through a fee based on a percentage of the assets under management (AUM). This fee structure aligns the manager's incentives with the client's success.

Q: What happens if I'm not satisfied with my discretionary investment manager's performance?

A: If you're dissatisfied with the performance, you should first discuss your concerns with the manager to understand the reasons behind the performance. If the issues are not resolved, you have the right to switch managers or management firms.

Q: Is a discretionary investment account the same as a managed account?

A: Yes, the term "managed account" is often used interchangeably with a discretionary investment account, as both involve a professional manager making investment decisions on behalf of a client.

Q: What level of communication can I expect from my discretionary investment manager?

A: You should expect regular communication regarding the performance of your investments, market outlooks, and strategic changes to your portfolio. The exact frequency and form of communication should be outlined in your agreement with the manager.

Q: Can I set restrictions on the types of investments made in my discretionary account?

A: Yes, you can set specific restrictions regarding the types of investments or individual securities that you do not wish to hold in your portfolio. These restrictions would be detailed in your IPS.

Q: Will I be notified of every transaction made in my discretionary account?

A: Notification policies vary. Some managers provide immediate transaction confirmations, while others summarize account activity in regular statements. This should be clarified with your manager.

Q: What kind of reporting will I receive on my discretionary investment account?

A: You will receive regular reports detailing account performance, transactions, and up to date account value. These reports help you track progress towards your financial goals.

Contact Mitch McLean Wealth Creation Today

Embarking on your wealth creation journey with Mitch McLean is a decision that promises dedicated service, professional expertise, and a commitment to achieving your financial goals. Contact us today to learn how our discretionary investment management services can elevate your investment experience and bring you closer to the future you envision.

Written by

Mitch McClean


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