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What does discretionary mean?

In the world of investing, “discretionary” refers to the power a portfolio manager has to make investment decisions on behalf of their client, including the asset allocation and when to buy and sell investments.

Discretionary powers are, in theory, used to maximise returns and manage risk in line with your specific goals, time horizon and financial situation. 

It’s important you understand the remit of your discretionary manager so you can have full faith when entrusting them with your money. Because of the great importance that comes with making investment calls on behalf of other people, this type of discretionary financial power is only granted to experienced, qualified investors.

Discretionary robo-advisors

Discretionary management can be expensive for retail investors and many have historically been unable to access this crucial wealth management service. 

Advances in technology have allowed innovative companies like Moneyfarm to reduce the cost of running these discretionary services, with these savings passed on to the retail investors. By keeping fees low, investors can maximise their return by keeping more of their money invested.

Digital wealth managers have made discretionary management more accessible to those wanting experts to manage their money. It takes a lot of time, skill and knowledge to manage your investments for your long-term financial goals and in line with your investor profile. 

Moneyfarm provides a unique blend of digital investment advice, human guidance and discretionary management to ensure investors make confident, stress-free investment decisions to build future financial security. Our investment team selects and manages the investments in our customised portfolios to ensure they are positioned to manage risk and take advantage of global investment opportunities in line with our customers’ needs. 

Advantages of discretionary management

Discretionary management holds a number of significant advantages for investors. These include:

  • The expertise of an experienced financial manager
  • Lower investment costs
  • Less stress than making investment decisions yourself
  • More time to spend on the things you enjoy in life

The greatest advantage is the expertise which is brought to the table. Inexperienced investors lacking the ability to make the right calls will miss out on the best opportunities, or even lose themselves money through rash decision-making. Meanwhile, experienced and knowledgeable managers are far more likely to be able to make smart investments which will reap the biggest rewards.

For people lacking the confidence to make investments on their own, some degree of financial guidance, be that advice or discretionary management, is paramount. For inexperienced investors, discretionary management is likely to be the best solution – increasing their chances of making good investments and reducing the stress on themselves.

Discretionary management also opens up a new range of investment options. Not only will a good portfolio manager know what makes a good investment, they will also be aware of the right time to buy and sell to secure good long-term positions. This is a key advantage of discretionary management – by categorising clients into portfolios based on their strategy and appetite for risk, managers can complete trades for many investors at a time, allowing everyone access to the best deals.

Disadvantages of discretionary management

One factor for investors to consider is their willingness to hand over control of their money to a portfolio manager. While these managers must be highly skilled and experienced to be able to legally invest on behalf of clients, it may be difficult to relinquish the final say on investments. 

Some investors prefer to manage their own investments, but it takes a lot of time and knowledge to do this successfully over the long-term. 

Another obvious pitfall of utilising discretionary investment management is the management fees that may come with it. These fees vary from company to company and can often prove prohibitive. However, with the advent of cost-effective digital services like those Moneyfarm offers, it is becoming easier to access affordable discretionary investment management.