Investors who do not wish to manage their own funds, but are only interested in generating profits, will put money into a discretionary management account. A discretionary management account is often confused with an advisory service, but they are two separate things. In a discretionary management scenario the investor will sign an agreement with a financial firm and give an outline of acceptable risk levels. In these agreements, the manager of the discretionary fund may make investments and modifications based on the agreement outline without conferring with the owner of the account. In an advisory service scenario the firm will recommend courses of action, but the owner of the account must approve actions and modifications before they are executed.
In both discretionary and advisory accounts, the managers of the account are responsible for the ongoing health of the account.
In order to help ensure success, it is important that the accurate information be available to the manager and the investor. You should speak about the following issues with your account manager.
Maintaining excellent and open lines of communication with your manager is the first step to a successful account. Providing your manager with inside information, including existing investments and savings, income and dependents and other commitments, will directly impact the service that you will receive. You must ensure that the information provided to your manager is current and relevant in order that the manager can put together a portfolio that is appropriate for your personal situation.
Personal vs. Group:
It is crucial to fully understand the type of service that your manager can provide for you. Some managers will develop a unique portfolio that relates to each customer and others will use a different model for different groups of investors. In the latter case, the specifications for your group might only meet some of your needs. It is important to ascertain what method your manager will use.
It is important for your manager to know if you are looking to use your portfolio to create immediate or long term income. Discuss when you need or expect to withdraw money.
Explain clearly to your manager what type of risks you are looking to take and why. Review your assets and discern how heavy of a loss you could sustain, review with your manager previous investments and the conditions under which they were bought or sold.
Discuss on the first meeting with your manager how you will be charged. Sometimes managers will take a percentage of the portfolio or make a charge on each trade executed and some make a combination of the two. Ensure that your manager regularly reports progress to make sure you are getting what you pay for.