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Discretionary Investment Management Definition, Benefits & Risks


Discretionary Investment Management refers to a type of investment management in which buy and sell decisions are made by a portfolio manager or investment counselor for the client. The benefits include professional expertise, stress reduction for the client, and potential for higher returns. The risks involve potential for loss due to market volatility, and the client necessarily relinquishing control of investment decisions to the manager.


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Key Takeaways

  1. Definition: Discretionary Investment Management refers to a type of investment management where buy and sell decisions are made by a portfolio manager or investment counselor for the client’s account. The client must sign a discretionary disclosure with the broker as documentation of the client’s consent. This approach gives the professional full authority and responsibility to manage the investments on behalf of the client.
  2. Benefits: The main advantages of Discretionary Investment Management include the professional expertise of dedicated portfolio managers, time-saving as all decisions are made by the manager on your behalf, personalized strategies tailored to your investment goals and risk tolerance, and potentially better investment performances through active management.
  3. Risks: However, there are also risks associated with Discretionary Investment Management. Since the decision-making power is in the hands of the portfolio manager, the client may not agree with all decisions made. Additionally, there could be a risk of loss due to market volatility and bad investment choices. Lastly, it may also lead to additional costs and fees due to the increased transactions carried out by the portfolio manager.


Discretionary Investment Management is a key concept in the business and financial sector as it refers to a type of investment management in which buy and sell decisions are made by a portfolio manager or investment counselor for the client’s account. The unique advantage lies in its ability to provide the freedom to a professional to manage investors’ portfolios and make investment decisions without needing the consent of clients for every transaction, thereby enabling swift and timely market response. However, it also carries inherent risks since clients must trust the judgment of the manager, as incorrect forecasting could potentially impact on the investment adversely. Recognizing this term is crucial for anyone involved in finance and investing, as it influences decision-making processes, strategies, and determines the level of control an investor has, or hands over to a manager.


The purpose of Discretionary Investment Management is to allow a professional investment manager or firm to make buying, selling, and other decisions for investments on behalf of the client. Essentially, the client gives the manager or firm the authority to make transactions without their explicit consent, often based on an agreed-upon overall strategy or portfolio model. This is used for individuals who may not have the time, advanced understanding, or desire to be involved in the day-to-day decision-making process of their portfolios. It offers a more hands-off approach to investing where the management responsibility, including research, selection, trading, and adjustments of the investments, is outsourced to experts.

Choosing Discretionary Investment Management comes with several benefits. First, it allows access to expert knowledge and experience in financial markets which can potentially lead to well-informed, efficient investment decisions. Second, it can save a significant amount of time for the client since the discretionary manager handles the supervision and rebalancing of the portfolio. Third, it provides a degree of emotional distance from the investment process, which can potentially prevent poor, emotion-led decision-making. However, there are also a few risks associated with it. The client loses a certain level of control over individual investment decisions and must trust the manager’s competency and integrity. Further, the fees associated with this service might be high, and, as with any investment, there’s always an inherent risk of losses, depending on market conditions.


Discretionary Investment Management is a form of investment management in which buy and sell decisions are made by a portfolio manager or investment counselor for the client’s account. The term “discretionary” refers to the fact that investment decisions are made at the portfolio manager’s discretion. This means the client must have the utmost trust in the portfolio manager’s capabilities and decisions.

Example 1 – Wealth Management: High-net-worth individuals often employ the services of private banks or wealth management firms that offer discretionary investment management. For example, a client of J.P. Morgan Private Bank may give them the permission to manage their assets. Here, the investment decisions — from broad asset allocation strategies to individual security selection — are made by the experienced portfolio managers of the firm. Benefits: The client doesn’t have to stress over day-to-day investment decisions and can rely on professional expertise. Risks: However, the risk includes the potential for mismanagement of assets, lack of understanding of the client’s risk appetite, and potential disagreements if the portfolio takes a downturn.

Example 2 – Pension Fund Management: Large pension funds often use a discretionary investment management approach to manage their significant assets. For instance, the California Public Employees’ Retirement System (CalPERS) operates in a discretionary manner, meaning that the fund managers make all the investment decisions on behalf of the pension fund. Benefits: This type of management can be particularly beneficial for large investment portfolios, which require skilled analysis and continuous monitoring. Risks: However, there’s a risk involved in terms of manager’s ability and decision-making skills, and their performance over time can significantly affect the welfare of the pension fund’s beneficiaries.

Example 3 – Investment Funds or Mutual Funds: Many investment funds, like Fidelity Investments, operate on a discretionary basis, with the fund manager deciding on the best places to invest capital to achieve the goals of the fund. Benefits: These fund managers have comprehensive knowledge and access to information, thus potentially yielding greater returns. Risks: However, their decisions may not always align with what individual investors would have chosen, which might lead to dissatisfaction among the investors.

Frequently Asked Questions(FAQ)

What is the definition of Discretionary Investment Management?

Discretionary Investment Management is a form of investment management in which buy and sell decisions are made by a portfolio manager or investment counselor for the client’s account. The term discretionary refers to the fact that investment decisions are made at the manager’s discretion.

What is a key benefit of Discretionary Investment Management?

The main benefit of discretionary investment management is that it allows the client to free up their time and offload the responsibility. Instead of making complex investment decisions on their own, they delegate this to a professional who has the knowledge and experience to make informed choices.

What are the risks involved in Discretionary Investment Management?

Although discretionary investment managers are professionals, they are not immune to the risk of the market. Investment values can rise and fall, and there is a risk that the value of your portfolio could decrease, resulting in a potential loss. There is also the risk that the investment manager could make decisions that the client disagrees with.

How does Discretionary Investment Management work?

With discretionary investment management, the client gives their consent for the portfolio manager to make investment decisions on their behalf. The manager will make buy and sell decisions based on their knowledge and expertise to achieve the client’s financial goals.

Can a client set parameters for Discretionary Investment Management?

Yes, even though the portfolio manager has the discretion to make investment decisions, the client can still set certain parameters or guidelines to follow, such as risk tolerance and investment preferences. These parameters have to be followed by the manager, ensuring that the client’s interests are taken into account.

Is Discretionary Investment Management suitable for me?

Discretionary Investment Management is typically suitable for individuals who do not have the time or expertise to actively manage their investments. It’s also suitable for those comfortable with delegating such important decisions. However, it is always best to consult with a financial advisor before deciding to use such a service.

Related Finance Terms

  • Portfolio Management: This is the process of making decisions about investment mix and policy, matching investments to objectives, asset allocation and balancing risk against performance.
  • Fiduciary Duty: This is an ethical and legal obligation of one party to act in the best interest of another, often associated with managing assets on behalf of an investor.
  • Risk Tolerance: This is the degree of variability in investment returns that an investor is willing to withstand in their financial planning.
  • Market Volatility: This term refers to the amount of uncertainty or risk associated with the size of changes in a security’s or market’s value. High volatility indicates a high degree of risk.
  • Asset Allocation: This is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon.

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