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All You Need To Know About Portfolio Management

All You Need To Know About Portfolio Management

In recent years the discretionary portfolio management of investment portfolios has become very fashionable. For a small investor, it is a very simple way to invest in the stock market with a high degree of diversification and without complicating life too much, since it allows you to delegate decision-making to a professional manager or advisor.

It is a service offered by many financial institutions that allows their clients to ignore the management of their investments , since both the strategy and the decision-making to buy or sell assets are taken by the financial institution on behalf of the client. .

Legal Regulation

In order to offer maximum transparency and not harm small investors , SEC regulation establishes that, at least, the following information must appear in every portfolio management contract:

  • The management objectives as well as any specific limitation to the discretionary management power that affects the client.
  • The types of financial instruments that can be included in the portfolio and the types of transactions that can be carried out with them.
  • The periodicity with which the client will be informed about the evolution of their portfolio, as well as the support they will receive and the rates that will be charged.
  • The obligation to immediately inform the client when losses exceed a threshold agreed between the parties (which may not exceed 25% of the managed assets).
  • Conflicts of interest that may exist between the managing entity and its group with some of the companies in which the investor’s assets are invested.
  • The possibility for the client to request information on each transaction carried out by the entity.
  • The limit of the commitments of the managed portfolio

Advantages And Disadvantages Of Discretionary Portfolio Management

Managed portfolios offer a number of benefits for clients. The most important of all is that it allows them to access a type of investment adapted to their risk profile and financial objectives , highly diversified and professionally managed by a manager.

In addition, you are relieved of the burden of decision-making, as these become the advisor’s. If this is reliable and the investment management costs are not high, the benefits for a small saver of investing under the umbrella and the supervision of an expert are unquestionable.

However, it is not gold everything that shines. These managed portfolios can have some drawbacks . The most notable of all is that, although most financial institutions put on the table a personalized management service that is adapted to each user, in practice this service is highly standardized.

Most entities only offer four or five model portfolios that correspond to general investment profiles in which each arriving customer is pigeonholed . Therefore, investors do not contract exclusive portfolios specially designed for them, but rather standard portfolios composed, for the most part, of a specific number of investment funds.

In this way, an investor with a conservative profile is assigned a portfolio with a high proportion of fixed income funds and with a smaller proportion of funds that invest in stocks, to avoid volatility; while an investor with less aversion to risk is offered another portfolio with more equities and fewer bonds.

 In summary, the discretionary management of investment portfolios is a service that can be interesting for what type of people , as long as its costs are not high and they are portfolios that really adapt to the risk profile of each person.

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