Discretionary portfolio management: the democratization of wealth management

Discretionary portfolio management has changed the financial entities landscape that have seen in this new type of contracts an opportunity to grow in customers while improving their return

The implementation of the MiFID II regulation in 2018 boosted the progress of this new type of contract by notably improving compliance thanks to the suitability tests, obtaining much more quality data about the financial intentions of each client.

Discretionary management is based on model portfolios that allow each entity to automatically and massively manage their clients’ portfolios. With this type of contract it is possible to monitor these investments with fewer resources involved. Therefore, financial institutions have the opportunity to turn towards a discretionary model of portfolio management that reduces the high costs of advice that are passed on to clients.

This new term of the financial world comes from the fact that it is precisely an investment of the client’s assets “at the discretion” of the entity looking for the best opportunities. A new way of investing that can involve a more automated process (industrialized) or a manual one (only available for certain clients). A model that combines the capabilities of each customer and advisor with the latest technology to optimize the cost and to systematize the service provided to the client.

Professional model portfolio construction and monitoring services play a crucial role in the automated process. For this discretionary portfolio management, the process is based on model portfolios, which allows customers’ portfolios to be automatically rebalanced. Using the data provided in their risk profile, the client will be assigned the model portfolio that best suits their investment objectives (including sustainable portfolios under ESG criteria), allowing contributions and refunds.

While before it was necessary to limit yourself to specific portfolios adjusted to certain risk profiles, today, thanks to the latest Artificial Intelligence, Machine Learning and Deep Learning technologies, we are able to create the model portfolio that best suits the needs of each client.

This discretionary automated portfolio management can be done through a wealth management software such as a Robo Advisor, for which it is essential to have state-of-the-art APIs that meet the specifications of each client. With experience, we have learned that to deliver the best management service it is essential that the business rules are configured under the rebalancing algorithm. This is what will allow optimizing the number of operations and therefore the costs that affect the client.

So, the trend in the financial industry is clear: entities are turning from advice to a discretionary management model, due to automation and cost reduction for their clients. Definitely, the investment in discretionary portfolios is revolutionizing the way of investing by allowing a real democratization in the wealth management industry.