Understanding the benefits of discretionary managed portfolios

Grant Meintjes, Head of Securities at PSG Wealth.

A well-constructed investment portfolio can last for generations to come. Investing wisely can help protect your initial capital investment and grow it to levels that would not otherwise be possible. Deciding on your approach to managing your portfolio is key to ensuring it can withstand volatile market environments. And while discretionary portfolios hold many advantages, the idea of giving up control can be a difficult stumbling block to clear.

Two basic approaches to advised portfolios

A securities portfolio should be part of your holistic financial plan. Once you have decided to incorporate advice on your portfolio, the next question is whether you need an “advised” or a “discretionary” approach. The difference comes down to the extent to which you allow your adviser to make decisions on your behalf.

With advised portfolios, your adviser won’t make any changes to your portfolio without checking with you first. They will share research with you but won’t act unless you specifically instruct them to. As the client, you are kept in the loop on every single decision, which can be a source of great comfort. However, this approach also holds challenges. If you are not immediately reachable, or not in a frame of mind to consider portfolio adjustments, you may miss out on opportunities.

With discretionary portfolios, you and your adviser agree on an investment strategy and mandate upfront, and your adviser can then act on that strategy without checking in before every trade. This means your adviser can take advantage of short-lived market opportunities, protecting the whole book or single shares in the portfolio. For this approach to succeed, you need trust between the parties. You also need a clear agreement on how often the adviser will report back, and how success will be defined.

Give up the illusion of control

For many investors, giving up control seems like a huge leap of faith. But one of the mental shifts investors need to make is to understand that an investment portfolio itself does not necessarily offer an advantage. Rather, the potential benefits manifest in the prudent management and efficient allocation of your capital. Clinging to control can undermine this process, and effectively hamstring your wealth creation efforts.

If properly executed, a discretionary portfolio will reflect your preferences and intentions. While you may give up control on individual trades, you retain control of the overall portfolio direction and composition.

Begin with a good investment strategy

Constructing a solid investment strategy is essential for a successful discretionary portfolio management relationship.

Your adviser will work with you to understand your long- and mid-term objectives, your true attitude to risk and capacity for loss, and how any existing investments might be optimised or adjusted. Once your discretionary manager has a full picture of your financial circumstances and goals, they will be able to create a portfolio that suits your needs.

Understand your risk tolerance

The perceived risks associated with securities can make investors feel the urge to keep a close handle on every trade. This is why it’s so important to agree upfront to a diversified approach, and to understand your risk tolerance. Risk comes in many different guises, and while shares tend to be fairly liquid investments, this is not always the case.

Diversify and limit concentration risk

Diversification into multiple asset classes will help protect your capital if one market segment underperforms, and this should form part of your overall investment strategy and mandate in a discretionary portfolio.

Weigh up the pros and cons

Investors should carefully weigh the advantages and disadvantages of different management approaches when it comes to managing their securities portfolios. The diversification and risk controls offered by a discretionary manager may add to the robustness of a portfolio, while the control offered by an advised or a DIY portfolio may come at a hidden cost.