A key question for private investors is whether they have the time and resources to manage a portfolio using the increasing diversity of asset classes and investment vehicles at their disposal.

John Seal, investment director at Rensburg Sheppards, points out that ‘Technology has made it easier for investors to manage their own portfolios, but they could spend all day simply reading information on investments. Tax has also become more complicated for a greater number of investors.

‘With the increased amount of information available, and more complicated tax arrangements, there is a need for good-quality advice and management.’

The advantages of discretion
Discretionary investment managers offer to manage a portfolio on your behalf, according to your personal risk profile, objectives and time horizon. By using discretionary managers, you outsource the running of your portfolio. You provide the investment manager with the authority to buy and sell investments without having to gain your approval before each transaction.

This differs from an advisory relationship, in which you retain full control of the day-to-day management of your portfolio. Your manager makes investment recommendations and sends you research, but you make the final decision on whether to invest.

Dealing with risk
Before constructing and managing your portfolio, the discretionary manager will evaluate your risk profile and objectives, including when and how much income you will want to take. Combining these with the time horizon in which you want to achieve your objectives, the manager should draw up a balance sheet of your finances.

Charlotte Black, director of corporate affairs at Brewin Dolphin, says this can incorporate clients’ special requests, such as environmental considerations or not wanting tobacco stocks within portfolios. You can determine the frequency with which you talk to your investment manager and review the performance of your portfolio and, therefore, your involvement in the decision-making process. Many managers provide online access so you can monitor your portfolio and performance at any time.

Discretionary managers argue that by delegating the running of your portfolio in this way, they can react more quickly to investment opportunities and changes in the market environment. This is particularly pertinent given the current market volatility. In an advisory relationship, it may take a manager a couple of days to get hold of clients and therefore the investment opportunity may have passed. Discretionary managers add that they can buy and sell investments in bulk for their clients, potentially reducing the cost of transactions.

Shares or funds?
The traditional model of discretionary management was based primarily on holding a portfolio of individual UK stocks. These were all, or mainly, part of the FTSE 100 index. Many discretionary managers still invest in individual stocks in the UK, but the rest of the portfolio may now comprise open- and closed-ended funds, ETFs and structured products.

David Miller, head of alternative investments at Cheviot Asset Management, says its portfolios typically have between 30 and 35 UK stocks chosen from the FTSE 350: ‘We believe we can add value to portfolios through stock selection. Cheviot also holds some individual stocks in continental Europe and the US. The rest of the portfolios comprise funds.’

The way in which managers construct and run portfolios, however, varies from one firm
to another. Under the traditional model, each investment manager was given the autonomy to run their clients’ portfolios and acted as the relationship manager for the client. Thus, he or she drew up the asset allocation, selected stocks and funds, monitored the portfolio, decided whether to make changes to the portfolio and managed client relationships.

Critics of this approach question how one person can successfully undertake all of these roles. This has especially become the case given the proliferation in asset classes available to managers and clients. It’s argued that it is hard enough for one individual to analyse and choose equities and fixed income, let alone hedge funds, private equity, property and structured products as well.

A personal service
Alternatively, the roles of the portfolio and relationship manager are distinct. As well as maintaining contact with the client and supplying information about his or her portfolio, the relationship manager conducts the ‘fact find’. This includes evaluating the client’s risk profile and objectives.

The relationship manager may draw up the asset allocation as well. This information may be passed to central investment committees who then construct each portfolio for individual clients. These portfolios may be based on models and tweaked according to each client’s individual circumstances.

There is no right or wrong approach. Advocates of giving autonomy to investment managers say the portfolio can better reflect the objectives and risk profile of the client. This is because the portfolio manager is talking to the client on a regular and ongoing basis. Over time, therefore, the investment manager should gain a very good understanding of the client and their risk profiles.

Supporters say that, as the investment manager has regular contact with the client, they can be more involved in the investment process. They add that they can include particular stocks or funds requested by clients, if appropriate.

Quality control
But a risk with this decentralised approach is that the performance of your portfolio may largely depend on which investment manager is assigned to you.

Those firms that employ a centralised approach argue that it can produce more consistent returns across portfolios. It avoids the situation where one manager at a firm is buying a particular stock and another manager is selling it. Managers with autonomy, however, say that portfolios are usually populated with stocks and funds from recommended lists and their performance is closely monitored and analysed.

In reality, many managers offer a hybrid approach. Hugh Adlington, investment director of Rathbones, says that its investment managers construct portfolios by choosing from central research and lists that are drawn up by committees. ‘We are more prescriptive in which funds are used in more complex areas such as hedge funds,’ he notes.

How much will it cost?
There is a cost with discretionary management, of course. This varies from one firm to another and the charging structure may be tiered according to the amount of assets
you have. Some firms also charge a fee for each transaction.

The minimum investment required to be taken on as a discretionary client also varies between managers. Paul Wharton, investment director at Deutsche Bank Private Wealth Management, says it typically wants clients to have investable assets of at least £500,000. He adds, however, that the firm does have discretionary clients with fewer assets than this.

Hugh Adlington says Rathbones has a minimum investment of £100,000, while Brewin Dolphin and Rensburg Sheppards do not have minimum requirements. Rensburg’s John Seal says some clients establish a portfolio for their grandchildren, for example. He adds that for less than £100,000, portfolios comprise funds and no individual stocks. The proportion of stocks used increases as investable assets rise.

What to look for
There are a number of factors you need to consider when using discretionary managers. This includes establishing a benchmark against which you can measure the performance of your portfolio. This may be cash, an absolute return or a combination of stock market indices.

Ask to see performance track records for the manager, and check the level of risk they have taken to deliver this. Ensure you understand the investment approach of the manager, the size and financial strength of the firm, how long it has been operating and how frequently you will see your investment manager. Ask about the level of charges, how long the managers have worked at the firm and what the general staff turnover is – and always ask for references.