What Is a Discretionary Investment Manager?

Investment management involves the professional handling of financial assets to meet specific investment goals. Discretionary investment management represents a distinct model where significant decision-making power is entrusted to the financial professional.

Defining Discretionary Investment Management

Discretionary investment management grants an investment professional authority to make investment decisions on behalf of a client without needing prior approval for each individual transaction. The manager can buy, sell, or rebalance a client’s portfolio as they deem appropriate, based on the established investment strategy. This authority is typically formalized through a written Investment Management Agreement (IMA), which outlines the scope of the manager’s powers and responsibilities.

This authority results in a streamlined investment process, as the manager can react swiftly to market changes or new investment opportunities without delay. This contrasts sharply with an advisory or non-discretionary relationship, where the advisor only recommends actions, and the client retains the ultimate decision-making power for every trade. In a non-discretionary arrangement, the client must approve each specific transaction before it is executed.

Entities that typically offer discretionary investment management services include Registered Investment Advisers (RIAs), wealth management firms, and some trust companies. These firms employ investment managers, portfolio managers, or financial advisors who are legally permitted to exercise discretion over client accounts. These professionals operate under a fiduciary duty, meaning they are legally obligated to act in the client’s best interest, placing the client’s financial well-being above their own or their firm’s.

The Discretionary Investment Process

The Investment Policy Statement (IPS) is the foundation of any discretionary investment relationship, developed collaboratively between the client and the investment manager. This statement outlines the client’s investment objectives, risk tolerance, time horizon, liquidity needs, and any specific investment constraints or preferences, such as ethical investing guidelines. The IPS guides the manager’s investment decisions, ensuring alignment with the client’s financial goals.

Once the IPS is established, the manager begins to implement the defined strategy through portfolio construction. This involves selecting appropriate asset classes, such as equities, fixed income, or alternative investments, and then choosing specific securities within those classes. The manager continuously monitors market conditions, economic indicators, and the performance of the chosen investments, making adjustments as necessary to maintain the portfolio’s alignment with the IPS. This active management includes rebalancing the portfolio periodically to restore its target asset allocation.

Security selection and ongoing adjustments are where the manager exercises their discretion. They analyze individual investments, conduct due diligence, and execute trades without needing to contact the client for approval on each transaction. For instance, if a particular stock’s valuation changes, the manager can decide to sell it and reinvest the proceeds into a more suitable alternative, all within the parameters set by the IPS. This continuous, proactive management optimizes portfolio performance and mitigates risk according to the client’s agreed-upon strategy.

Client Interaction and Oversight

Client interaction with a discretionary investment manager involves regular, structured communication rather than frequent, ad-hoc approvals of trades. Clients receive periodic reports detailing their portfolio’s performance, asset allocation, and any significant changes or transactions that occurred. These reports provide transparency and allow clients to track progress and understand manager activities. Beyond these formal reports, scheduled review meetings are common to discuss any life changes, re-evaluate the IPS, and address client questions.

The fee structure for discretionary investment management is based on a percentage of the assets under management (AUM). This AUM fee is calculated annually but billed quarterly, and it can range from 0.50% to 2.00%, depending on the total value of the assets managed and the complexity of the services provided. For instance, a client with a $1,000,000 portfolio might pay an annual fee of $10,000 if the AUM fee is 1.00%. This fee model aligns the manager’s success with the client’s, as compensation increases as the portfolio grows.

While the manager holds discretion over investment decisions, the client retains an important oversight role. This includes reviewing all statements and reports to ensure accuracy and understanding of the portfolio’s activity. Clients are also responsible for communicating any changes in their financial situation, risk tolerance, or investment goals, as these may necessitate an update to the IPS. This collaborative approach ensures that the discretionary management remains aligned with the client’s evolving needs. Regulatory bodies, such as the Securities and Exchange Commission (SEC) for larger firms and state securities regulators for smaller firms, provide oversight for investment managers. These regulators establish rules governing disclosure, conduct, and client protection.