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#Investments — 04.11.2016

Discretionary Portfolio Management: what are the advantages?

Luc Lefer

Portfolio management, discretionary management and delegated management are all terms which describe an expertise and a relationship which are part of long-term client service. But what is it exactly and what are the advantages for someone with savings?

First of all, what are we talking about?

Portfolio management, discretionary management and delegated management are some of the numerous terms to describe a contract between a “principal” and an “agent” for the provision of a service.

In the private banking world, the principal (the client) entrusts a part of his/her financial assets to an agent (the private bank) to manage, according to the terms of a contract signed by the two parties.

This contract requires the involvement of a portfolio manager whom the client delegates to manage assets within a precise framework, taking into account all of the following:

  • the knowledge of the client’s financial products
  • the client’s risk appetite
  • the client’s need and financial objective

Portfolio management is therefore a financial service offered by the bank alongside advisory management. In the first case, the client entrusts his/her assets to a portfolio manager, and in the second, he/she receives advice from his/her relationship manager to make independent investment decisions.

These two services are not exclusive and a client may have a strong preference to delegate the management of some of his/her assets while keeping the capacity to manage another part independently.

Did you say “delegate”?

Yes, exactly. It is the main characteristic of portfolio management.

In wealth management (as in everyday life), there are several reasons why someone might decide to delegate:

  • to find a specific skill/expertise
  • to save time
  • to benefit from a set-up that he/she would not be able to manage alone.

But delegating does not necessarily mean losing control. Indeed, a delegation mandate must provide the necessary resources to inform the client when the objective of the delegation is met.

What is the advantage from a savings point of view?

I prefer to say “advantages” in the plural because having savings does not necessarily mean that we have the knowledge, desire, time or tools to manage these savings on a daily basis and, at the same time, follow news flow which necessarily has an impact on financial assets.

Firstly, delegating helps to meet an objective or finance a project, such as planning for retirement or paying for children’s education. Secondly, to meet this objective, an expert is mandated who will know how to save you time while keeping you regularly informed.

Indeed information, forecasting and the financial markets—the basics for seeking a return on investment—change by nature and need regular attention.

This is the daily role of a portfolio manager who works in a team to generate performance while managing associated risks.

Portfolio management therefore combines 3 main areas of expertise:

  • asset allocation (managing diversification)
  • the selection of  financial instruments (choosing equities, bonds, funds, etc.)
  • risk management (level of volatility, liquidity of instruments, etc.)

This expertise and relationship are part of long-term client service.