Discretionary Management – is it worth it? costs & pitfalls

Discretionary Management (DM) might sound like a fancy word in an already fancy investments world. In reality this just means that your investment portfolio is managed constantly by professional account managers.

This service, which is normally offered by Private Banks or Investment Management entities, would have people directly responsible for choosing your investments according to a particular strategy and risk profile chosen at outset. The discretionary managers will act on your behalf and change the underlying investments as they deem fit without the need to consult with you each and every time as they have the powers to do so.

So, where is the problem?

With the introduction of MiFID II, banks and investment companies are now obliged to provide clients with a breakdown of all the fees and charges that would have been taken throughout the year.

What creates confusion is that there are a variety of fees and more often then not, are split in different parts rather than being presented as a ball park figure (or percentage). Fees are normally taken in the following manner:

a) When buying/selling instrument (normally split between bank/investment company)
b) Annually as a ‘discretionary management’ fee (charged by the bank/investment company)
c) Annually as an administration fee (charged by the bank/investment company)
d) Underlying fund manager fee (charged by the underlying fund manager when using funds. Some of this fee is kept by the fund manager whilst normally, the remaining part is given to the bank/investment company for advertising and using the fund with their clients. This is known as retrocession or commission).

Some of these fees are quite standard and at the end of the day, everyone needs to be paid for their services. The problem emerges when these fees are so high that end up eating away any return generated from the investments.

Unfortunately, it is not the first time that we reviewed such managed portfolios for our clients and a similar pattern emerges – Fees are high, performance is disappointing and clients are dissatisfied as they were not aware of this.

Why is the case and what to do about it?

When having a managed account, especially when the amount invested is quite considerable, one can be an easy target for such situations. Below are a couple of things which one need to take note of:

1. Having a number of funds that are included multiple times in the portfolio.  Such situation means that although you have a large pool of funds in your portfolio, there are some which are exactly the same and hence, there is no diversification benefit at all. By holding the same funds, it means that you would be buying/selling the same thing all over again and hence gives rise to additional and unnecessary fees.

2. Holding a considerable amount of internally managed funds. In most cases, internally managed funds would have a higher fee attached to them and hence, the manager might be more incentivized to use such instruments. This might give rise to conflict of interest and lack of independence from the manager.

3. Apart from fees, holding a large number of instruments in the same category or sector will lead to ‘over – diversification’.  Although diversification is good, holding too much of the same thing means that you are pretty much owning most of the market. For example, holding too many active managed European Large Cap funds would provide the same risk/return characteristics of holding the whole market in that sector. This basically means you could be better off buying a cheaper passive fund, such as an ETF or an index fund, which simply tracks an index. Such thing happens because if you over-diversify with fund selection rather than just asset classes, then your performance is destined to revert to median or the sector average – hence, you really end up buying an expensive tracking fund! Investors normally buy active managers to take bets against the benchmark and deliver superior returns. However, owning too many active funds can defeat the point of paying higher fees.


Here at investingmoney.biz, we would be happy to look into your managed portfolio and provide you with an in-depth independent analysis so you can make sure that the fees charged are fair, whilst at the same time your portfolio is aligned to your objectives, risk attitude and financial circumstances. Click HERE to know more about our Portfolio Check-up service.

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