Discretionary Management Agreement: What Is It and How Does It Work?
A discretionary management agreement is a type of investment management service where an investment manager has the authority to make investment decisions on behalf of a client without seeking their approval for each transaction. This agreement allows the investment manager to have flexibility in managing the client`s portfolio according to their investment objectives, risk tolerance, and other factors.
Under a discretionary management agreement, the investment manager is responsible for making decisions about the securities or other investments that will be traded, the amount that will be bought or sold, and the timing of the trades. The client delegates authority to the investment manager to make these decisions on their behalf, trusting the manager`s expertise and experience.
This type of investment management agreement is typically used by high net worth individuals, institutional investors, and other sophisticated investors who do not have the time, expertise, or desire to manage their investments actively. By delegating the decision-making to a professional investment manager, these investors can focus on other aspects of their lives or businesses.
The investment manager is often compensated through fees based on the assets under management or a percentage of the investment returns. The fees are typically higher than those charged for non-discretionary investment management services because of the additional responsibility and flexibility that comes with the discretionary agreement.
One of the advantages of a discretionary management agreement is that the investment manager can react quickly to changing market conditions, news events, or other factors that may affect the client`s portfolio. The investment manager can make adjustments to the portfolio without seeking the client`s approval for each trade, which can save time and reduce transaction costs.
However, with greater authority comes greater responsibility. The investment manager must act in the best interests of the client and make investment decisions that are consistent with the client`s investment objectives and risk tolerance. The investment manager must also provide regular reports to the client on the performance of the portfolio and any changes that were made.
When considering a discretionary management agreement, it is essential to work with an investment manager who has a track record of success and a reputation for putting the client`s interests first. You should also understand the fees and any potential conflicts of interest that may arise from the agreement. A reputable investment manager will be transparent about their fees and provide clear explanations of their investment decisions.
In conclusion, a discretionary management agreement can provide investors with a convenient way to delegate investment decisions to a professional investment manager. However, it is important to carefully consider the risks and benefits of this type of agreement and choose an investment manager who is trustworthy and experienced. With the right investment manager, a discretionary management agreement can help investors achieve their investment goals and avoid the stress and time associated with active investment management.
