Discretionary vs. Non-Discretionary Mandate: Advantages and Disadvantages
Introduction
In the world of investment management, two main types of mandates are often used by investors and fund managers: discretionary and non-discretionary. Each type of mandate has its own unique characteristics, along with advantages and disadvantages that vary depending on the investor’s needs. This article will explore in depth the differences between discretionary and non-discretionary mandates, as well as discuss the pros and cons of each.
What Is a Discretionary Mandate?
A discretionary mandate gives full authority to the fund manager to make investment decisions without needing prior approval from the investor. In other words, the fund manager has the freedom to choose which assets to buy or sell, based on the agreed-upon investment strategy.
Advantages of a Discretionary Mandate
- Quick Investment Decisions: The fund manager can act swiftly in response to changing market conditions. This is important in situations where immediate decisions are required to take advantage of investment opportunities or to mitigate losses.
- Active Portfolio Management: With a discretionary mandate, the fund manager can actively manage the portfolio, making necessary adjustments to ensure the portfolio remains aligned with the investment objectives and market conditions.
- Effective Risk Management: The fund manager can implement risk management strategies more effectively, such as selling high-risk assets or purchasing safer ones, without needing to wait for the investor’s approval.
- Time Savings for Investors: Investors do not need to be involved in every investment decision, allowing them to focus on other matters. This is particularly useful for busy investors or those with limited investment knowledge.
Disadvantages of a Discretionary Mandate
- Lack of Control for Investors: Investors relinquish full control to the fund manager, meaning they may not have input on certain investment decisions. This can be an issue if the decisions made do not align with the investor’s expectations.
- Potential for Conflicts of Interest: There is a risk that the fund manager might make decisions that benefit them more than the investor. Therefore, it is important to choose a fund manager with a good reputation and who acts according to professional ethics.
- Higher Management Costs: Discretionary mandates typically come with higher management fees due to the more active and detailed portfolio management.
What Is a Non-Discretionary Mandate?
A non-discretionary mandate, on the other hand, requires the fund manager to obtain the investor’s approval before making any investment decisions. The fund manager will present investment recommendations to the investor, and the investor has full authority to approve or reject these recommendations.
Advantages of a Non-Discretionary Mandate
- Full Control by the Investor: Investors have full control over every investment decision. This means that investors can ensure that every decision made is aligned with their objectives and risk tolerance.
- Reduced Risk of Conflicts of Interest: Since investors are directly involved in investment decisions, the risk of conflicts of interest between the fund manager and the investor is lower.
- Lower Management Costs: Non-discretionary mandates generally involve lower management fees due to the less active portfolio management and the investor’s involvement in every decision.
Disadvantages of a Non-Discretionary Mandate
- Delays in Investment Decisions: The process of obtaining investor approval can delay the execution of investment decisions. This may result in missed investment opportunities or exposure to unexpected market risks.
- High Workload for Investors: Investors need to spend time and effort evaluating each investment recommendation, which can be burdensome, especially for busy or inexperienced investors.
- Less Active Portfolio Management: Due to the need for approval, portfolio management may become less active. This can result in the portfolio not being adjusted quickly in response to market changes.
Which Mandate Is Right for You?
Choosing between a discretionary and non-discretionary mandate depends on several factors, including the level of control the investor desires, the investor’s knowledge and experience in investments, and the time they can dedicate to managing their investments.
- If you prefer active management and trust the fund manager to make the best decisions, a discretionary mandate might be more suitable.
- On the other hand, if you want full control over investment decisions and are willing to spend time evaluating each recommendation, a non-discretionary mandate is a better choice.
Conclusion
Both discretionary and non-discretionary mandates have their own advantages and disadvantages that investors should consider. Understanding the differences between these two types of mandates is crucial for making the best decision based on your investment needs and goals. By choosing the right mandate, investors can achieve a balance between control, efficiency, and potential investment returns.
As a wealth advisor, Mr TS specializes in creating customized financial strategies that empower clients to build and protect their wealth. With a client-focused approach, Mr TS ensures that each plan is tailored to meet the unique financial goals and aspirations of every individual.