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What is discretionary investment management?

As interest rates plummet we all need to look for alternatives to saving in cash accounts. But what do you do if you don’t understand investing? How can you ensure that you’re not picking a dud stock and risking your life savings? In step the discretionary investment managers, but what does discretionary actually mean?

Discretionary investment management defined

This is a form of investment management where an individual has given a manager permission to invest on their behalf. All buy and sell decisions are made by a portfolio manager or an investment committee on behalf of the individual.

The use of the term ‘discretionary’ refers to the fact that the manager has been given the freedom to decide what should be done with the investment. Individuals need to have a lot of trust in the portfolio manager’s capabilities.

How discretionary management works

Historically discretionary accounts came with hefty fees. According to research conducted by Compeer, you could be charged as much as £3,250 a year on a portfolio of £50,000. At Moneyfarm you would pay £470 a year.

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By making an investment, your capital is at risk.

Many still doubt the independence of discretionary investment managers. Pre-2012 discretionary accounts were often full of stocks and shares that benefitted the manager as opposed to the client. Luckily the Retail Distribution Review put a stop to that, if you’re paying for discretionary management you are paying for a professionally managed account focussed on returns.

See how Moneyfarm’s discretionary account could work for you.

The benefits of discretionary management

There are three key benefits to discretionary management.

  • You no longer have to make day-to-day investment decisions, freeing up time to focus on the things that really matter.
  • It is in the interest of the discretionary manager to do well as fees are based on a percentage of the portfolio. If your portfolio is worth more, they receive more in fees.
  • You can access areas of the market that you wouldn’t usually be able to; either because you don’t have the knowledge to find it or because there is a high entry point.

It is absolutely key that a discretionary manager understands your appetite for risk, this is still your investment and it needs to work for you. Make sure your discretionary manager has a robust screening process and that you’re happy with what they suggest. At Moneyfarm you can get all that advice, including the assets that will be in your portfolio, before you commit to investing.

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