Definition
Discretionary Investment Management refers to a type of investment management service in which a portfolio manager has the authority to make investment decisions without the prior approval of the client. This is akin to giving someone the keys to your mansion and telling them to decorate it just how they please—just hope they’re not into neon flamingos and clown paintings!
Discretionary Investment Management vs Non-Discretionary Investment Management
| Feature |
Discretionary Investment Management |
Non-Discretionary Investment Management |
| Decision-Making Authority |
Portfolio manager (high discretion) |
Client (limited discretion) |
| Client Involvement |
Minimal involvement |
Significant involvement |
| Speed of Investment Decisions |
Faster trades |
Slower trades due to client approval |
| Trust Requirement |
High trust in manager’s expertise |
Moderate trust |
| Typical Clients |
High net-worth individuals |
Average investors |
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Portfolio Manager: A professional responsible for making investment decisions and managing a portfolio of assets on behalf of clients. (Kind of like a coach, but instead of cheering from the sidelines, they’re calling the shots!)
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Chartered Financial Analyst (CFA): A professional designation awarded to financial analysts for their mastery of investment analysis and portfolio management. (They deserve a cape!)
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Financial Risk Manager (FRM): A professional designation for those who manage risk in investment portfolios. (They’re like the insurance agents of the financial world!)
To assess the performance of a discretionary investment portfolio, the following formula can be used:
Portfolio Return = (Ending Value - Starting Value) / Starting Value * 100
graph TD;
A[Starting Value] --> B[Ending Value]
B --> C[Portfolio Return]
C --> D[Investment Decisions made Discretionarily]
Humorous Insight
“It’s better to invest in your own portfolio manager than your brother-in-law’s bakery—unless he offers free donuts!” 🍩
Fun Facts
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The first investment fund was set up in 1774 by a Scottish merchant named Abraham van Ketwich. He probably never imagined there would be beach-themed investment firms today!
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Discretionary investment management can lead to higher returns if the portfolio manager is exceedingly skilled, but “if” is the operative word here—there’s a reason they don’t call them “portfolio magicians!” 🪄
FAQs
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What qualifications should I look for in a discretionary investment manager?
- Look for advanced degrees and professional designations such as CFA, CAIA, or FRM. If they have a PhD in “making money,” even better!
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Is discretionary investment management suitable for everyone?
- Not really! It’s most suitable for those with a good amount of wealth and a preference for not being involved in day-to-day decisions—kind of like how you “manage” your house plants!
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Can I withdraw funds anytime?
- Yes, but check with your manager; Halloween costume emergencies shouldn’t affect your long-term portfolio strategy.
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Are there fees associated with discretionary investment management?
- Absolutely! It’s like paying your dentist for a clean bill of health—it can be worth it, but still comes with a price tag!
Suggested Readings
- “The Intelligent Investor” by Benjamin Graham
- “A Random Walk Down Wall Street” by Burton Malkiel
Online Resources
Test Your Knowledge: Discretionary Investment Management Challenge
## What does "discretionary" mean in discretionary investment management?
- [x] Decisions are made by the investment manager without needing client approval
- [ ] Clients must approve every decision
- [ ] It refers to investments that can be used for discretionary spending
- [ ] It means the portfolio manager can invest in only tech stocks
> **Explanation:** In discretionary investment management, the investment decisions are made at the manager's discretion, allowing them more flexibility compared to non-discretionary management.
## What is often a requirement for a professional providing discretionary investment management?
- [x] Advanced educational credentials
- [ ] Experience in parenting
- [ ] Ability to sing investment themes
- [ ] A license to operate a drone
> **Explanation:** Investment managers typically hold qualifications like CFA or FRM to provide discretionary investment management, not to fly drones!
## Which of the following is a key benefit of discretionary investment management?
- [x] Faster decision-making
- [ ] Ability to choose your own stocks
- [ ] Lower investment fees
- [ ] The ability to complain about poor performance later
> **Explanation:** Discretionary management allows for faster decision-making as the manager does not need to seek client approval first.
## Who typically uses discretionary investment management services?
- [ ] Your neighbor
- [ ] A person who really loves DIY projects
- [x] High net-worth individuals
- [ ] People saving for a pack of gum
> **Explanation:** It is most commonly utilized by high net-worth individuals who prefer professional help in managing their investments.
## What is a potential downside to discretionary investment management?
- [x] Trusting someone else's judgment entirely
- [ ] Guaranteed returns on investments
- [ ] No involvement in investment choices
- [ ] Guaranteed daily updates on portfolio value
> **Explanation:** A potential downside is the need to fully trust the manager's decisions without involvement.
## What type of communication might you expect from a discretionary investment manager?
- [ ] None at all
- [x] Regular updates and reports
- [ ] Telling you "Trust me, bro!"
- [ ] Weekly life hacks
> **Explanation:** Discretionary managers typically provide regular updates and performance reports to keep clients informed.
## Can you withdraw your investments anytime from a discretionary account?
- [ ] Only with a month’s notice
- [x] Yes, but it depends on the agreement with the manager
- [ ] No, once you're in you can never leave!
- [ ] Only during a full moon
> **Explanation:** While you can generally withdraw funds, it depends on your agreement with the investment manager.
## What does a Chartered Financial Analyst (CFA) designation signify?
- [x] Expertise in investment analysis and portfolio management
- [ ] They are good at making paper planes
- [ ] They run an investment-themed escape room
- [ ] They know all about financial jokes
> **Explanation:** A CFA designation indicates specialized knowledge and expertise in investment analysis.
## When might a non-discretionary investment management be preferred?
- [x] When clients want control over decisions
- [ ] When no fees are involved
- [ ] When no knowledge is required
- [ ] When investing in candy stores
> **Explanation:** Non-discretionary management is preferred by clients who wish to maintain control over individual investment decisions.
## What is an advantage of discretionary investment management for busy individuals?
- [x] It saves time by avoiding everyday investment decisions
- [ ] It involves less paperwork than DIY investing
- [ ] It allows for snacking while investing
- [ ] It makes it more fun at parties
> **Explanation:** Discretionary management saves time and effort by allowing the manager to handle day-to-day investment decisions.
Thank you for joining us on this delightful tour through discretionary investment management! Keep your investments steer with a smile and remember, “An investment in knowledge always pays the best interest”—and sometimes, the best punchlines! 💰😄
