Discretionary Account

A Discretionary Account (also known as a managed account) is a type of investment account where you, the client, give a portfolio manager or financial advisor the authority to buy and sell assets on your behalf without needing your pre-approval for each transaction. Think of it as hiring a professional driver for your investment portfolio. You tell them the destination—your financial goals—and agree on the rules of the road, but you let them handle the steering, acceleration, and braking through the twists and turns of the market. This authority is formally granted through a legal document, often a Limited Power of Attorney (LPOA), which outlines the scope of the manager's power. This setup is the polar opposite of a non-discretionary account (or advisory account), where the advisor can suggest ideas, but you have the final say and must approve every single trade before it can be executed.

The foundation of any good discretionary account is the Investment Policy Statement (IPS). This is not just a formality; it's the master plan and the core agreement between you and your manager. Before any trading begins, you will work with the manager to create a detailed IPS. This crucial document outlines:

• Your investment objectives (e.g., capital growth, income generation, wealth preservation).
• Your personal risk tolerance (how much sleep you'd lose if the market dropped 20%).
• Your time horizon (when you'll need the money).
• Any specific constraints or preferences you have, such as a desire to focus on ESG investing or a strict rule against investing in certain industries.

Once the IPS is signed, the manager has the “discretion” to operate within its guidelines. They will use their expertise, research, and strategy to build and manage the portfolio, aiming to meet the objectives laid out in the IPS. The key benefit here is speed and efficiency. If a fantastic opportunity arises or a risk suddenly appears, the manager can act immediately without the delay of trying to contact you for permission.

For a follower of value investing, the decision to use a discretionary account is a significant one, with clear trade-offs.

• Professional Management: You gain access to a professional's expertise, research capabilities, and a disciplined investment process. A good manager can systematically sift through opportunities and avoid common behavioural biases.
• Emotional Discipline: One of the hardest parts of investing is controlling fear and greed. A professional manager can act as a crucial emotional circuit-breaker, sticking to the long-term plan outlined in the IPS rather than panic-selling during a market downturn or chasing a hot stock.
• Time-Saving: If you're a busy professional, a business owner, or simply someone who doesn't have the time or inclination to perform deep due diligence on individual companies, a discretionary account handles the heavy lifting for you.

• Fees, Fees, Fees: This is the big one. Discretionary accounts are not cheap. Managers typically charge a management fee calculated as a percentage of your Assets Under Management (AUM). A common fee is 1% of AUM per year, which can create a significant drag on your returns over time. For a value investor, who is inherently cost-conscious, this is a major hurdle to overcome.
• The Trust Factor: You are placing immense trust in your manager. As the great Warren Buffett has often implied, it's hard to find someone who will care about your money as much as you do. The success of the account depends entirely on the manager's skill, integrity, and alignment with your philosophy.
• Loss of Control: By definition, you give up the final say on individual investment decisions. You won't be involved in choosing to buy shares of Company X or sell shares of Company Y. For many hands-on value investors who relish the hunt for undervalued gems, outsourcing this core activity is simply unthinkable.

A discretionary account can be a valid choice, but it requires more due diligence on the manager than you would typically perform on a single stock. The core question is not just “Is this manager good?” but “Is this manager a true value investor whose philosophy and incentives are aligned with mine?” Before signing up, you must scrutinize their long-term, after-fee track record, understand their decision-making process, and be comfortable with the cost. The high fees mean the manager must deliver genuinely superior performance to justify their existence. For many dedicated value investors, the joy of the craft and the desire to control their own destiny (and costs) will always outweigh the convenience of handing the keys to someone else. Ultimately, a discretionary account is only as good as the person exercising the discretion.