Discretionary Account

Introduction

When it comes to managing investments, individuals have various options to choose from. One such option is a discretionary account, which offers a unique approach to investment management. In this article, we will explore what a discretionary account is, how it works, and the benefits and considerations associated with it. By the end, you will have a clear understanding of whether a discretionary account is the right choice for you.

What is a Discretionary Account?

A discretionary account is an investment account where an individual or entity grants a professional money manager the authority to make investment decisions on their behalf. In this arrangement, the investor delegates the day-to-day management of their portfolio to the money manager, who has the discretion to buy, sell, and trade securities without seeking prior approval for each transaction.

Discretionary accounts are typically offered by wealth management firms, investment advisors, and brokerage houses. The money manager responsible for the discretionary account is often a seasoned professional with expertise in financial markets and investment strategies.

How Does a Discretionary Account Work?

When an investor opens a discretionary account, they enter into an agreement with the money manager outlining the scope of the manager's authority. This agreement includes details such as investment objectives, risk tolerance, and any specific restrictions or preferences the investor may have.

Once the account is set up, the money manager takes on the responsibility of actively managing the portfolio. They analyze market conditions, research investment opportunities, and make decisions based on the agreed-upon investment strategy. The manager has the flexibility to adjust the portfolio's holdings as they see fit, without seeking the investor's approval for each trade.

Investors in discretionary accounts typically receive regular reports and updates on the performance of their portfolio. These reports provide transparency and allow investors to stay informed about the manager's investment decisions and the overall progress of their investments.

Benefits of a Discretionary Account

1. Professional Expertise: One of the primary benefits of a discretionary account is gaining access to the expertise of a professional money manager. These managers have extensive knowledge of financial markets and investment strategies, which can be valuable in navigating complex investment landscapes.

2. Time-Saving: By delegating investment decisions to a money manager, investors can save significant time and effort. They no longer need to research investment opportunities, monitor market conditions, or execute trades themselves. This allows investors to focus on other aspects of their lives while still benefiting from professional investment management.

3. Diversification: Money managers in discretionary accounts often have access to a wide range of investment options, including stocks, bonds, mutual funds, and alternative investments. This diversification can help spread risk and potentially enhance returns by investing in different asset classes and sectors.

4. Emotional Discipline: Investing can be an emotional rollercoaster, especially during periods of market volatility. With a discretionary account, investors can benefit from the emotional discipline of a professional money manager. The manager can make rational decisions based on market conditions and the investor's long-term goals, without being swayed by short-term market fluctuations.

Considerations for a Discretionary Account

1. Fees: Discretionary accounts typically involve management fees, which can vary depending on the provider and the size of the account. It's important for investors to understand the fee structure and assess whether the potential benefits outweigh the costs.

2. Trust and Communication: Since investors are entrusting their money to a money manager, trust and effective communication are crucial. Investors should thoroughly research and select a reputable money manager who aligns with their investment goals and values. Regular communication and updates from the manager can help build trust and ensure transparency.

3. Loss of Control: By delegating investment decisions to a money manager, investors relinquish control over the day-to-day management of their portfolio. While this can be a benefit for some, others may prefer to have more control and be involved in every investment decision.

Case Study: The Success of a Discretionary Account

Let's consider the case of John, an investor who opened a discretionary account with a reputable wealth management firm. John had a demanding job and limited time to manage his investments. By delegating the investment decisions to a money manager, John was able to focus on his career while still benefiting from professional investment management.

The money manager in John's discretionary account had a proven track record of delivering consistent returns and managing risk effectively. Over the course of five years, John's portfolio outperformed the market, generating an average annual return of 10%, compared to the market's average return of 7%.

Furthermore, the money manager's expertise in diversification helped protect John's portfolio during market downturns. While the market experienced significant volatility during this period, John's portfolio remained relatively stable, thanks to the manager's strategic allocation across different asset classes.

Conclusion

A discretionary account offers investors the opportunity to delegate investment decisions to a professional money manager. This arrangement can provide benefits such as access to expertise, time-saving, diversification, and emotional discipline. However, investors should carefully consider factors such as fees, trust, and loss of control before opting for a discretionary account.

By understanding the workings of a discretionary account and assessing their own investment goals and preferences, individuals can make an informed decision about whether a discretionary account aligns with their financial needs and objectives. Remember, investing involves risks, and it's essential to consult with a financial advisor or professional before making any investment decisions.