HSBC Emerald Legacy Life IIIDecember 12, 2022
China Life Harvest Income Plan (USD)January 30, 2023
The main difference between discretionary investment management and investment advisory management is, who has the final decision-making authority over the investments. In discretionary investment management (DIM), the investment manager has the authority to make investment decisions on behalf of the client without seeking their approval. In DIM, the client gives the manager the power of attorney to make decisions on their behalf. In investment advisory management (IAM), the client receives advice from the investment manager but retains the final decision-making authority over their investments.
Yr2022 and the issues with Proposal-Acceptance Arrangements
Year 2022 saw interest rates rise at a fast pace to combat inflation. Ukraine war dragged on longer than anticipated. Portfolio changes to respond to market shifts was only natural. In a year of changes such as this, the proposal-acceptance arrangement has a delay in response to the dynamic markets.
A proposal-acceptance arrangement (IAM) operating in a fast changing market dynamic can have any combination of the following issues.
- The advisor representative did not take any action.
- The advisor representative did call for action, but the client either did not respond, or responded late.
- Having a massive list of proposal-acceptance arrangements to fulfil, operationally not scalable, some received advice sooner than others, some executions were early and some were late.
As a result, outcomes have been less than optimal, portfolios stray from intended model portfolios by various degrees across a spectrum. Attribution becomes messy with conversations sounding like, “Why you never inform me?”, “I got alert you, but you never respond.”
Proposal-Acceptance Arrangements have its purposes
Primarily, responsibility does not fall 100% squarely on the Advisor or its representative. All they have to do is to provide a reasonable basis for recommendation will do. And it is the client who takes responsibility for accepting the recommendations.
That is advisory, consistent with the phrase people throw around sometimes, “I will take it as advisory.” implying that the final decision rests with the one who said the phrase.
Point to note are ILP (Investment Linked Plans) fund switch calls that may not come with a formal basis for recommendation. A distinction must be made to differentiate formal advisory from goodwill advisory. Most of the time, the financial advisor representative (FAR) who assisted in implementing the ILP, is not contractually duty bound to watch over the investments. The FAR who does so, is doing out of goodwill. However, such a setup also runs into the same issues with Proposal-Acceptance Arrangements.
All this while, we are assuming the recommendation advice gives good outcomes. That is not always the case, and clients must take responsibility for those outcomes. All the Advisor and its representatives need to provide is – reasonable basis.
Minimizing delay in responding to market changes
Investment markets demand attention and monitoring. Yr2022 showed that inaction is also a decision in investment terms. I have always considered that risks and returns are not the only considerations in deciding asset classes. A third axis is monitoring effort.
Personally, for my securities advisory services (securities wrap account, not Unit Trust wrap account), I broadcast daily morning updates compiled from various readings in Mosiac style. Such clients know that I am genuinely monitoring the markets via the daily updates. The securities advisory service also falls under the proposal-acceptance arrangement setup. But when the stock recommendation emails are sent out, I also inform them via whatsapp to respond to the email then I can perform the execution.
It is only reasonable that a recommendation comes with an expiry date. It is 2 days in the case of securities advisory service.
Financial advisory firms have definitely stepped up to automate trade executions upon receiving the client approval to proceed with the investment recommendations. This is of course to minimize delay. For Unit Trusts (UT), end of day pricing means as long as the approval response came within a day, mostly all is well. But for securities, hours and minutes do count.
However, not every client sits in front of a computer screen waiting 24/7 for an investment recommendation prompt. Some may be genuinely busy, some overlook, some forget to respond. This client response timing is not within control of the Advisor and its representatives.
I had a whisky BYOB session at my rooftop garden with pals from the industry just the other day. One of them had his assistant call everyone whenever fund switches are called for. Similar in my approach, just that I don’t have a personal assistant. Bottomline, this is not scalable for me. Hence, I am officially announcing in this blogpost that I am moving into Discretionary Investment Management.
Roboadvisor Investment Funds will be my competition
Over time, performance attribution will be harder to extract in a proposal-acceptance arrangement setup. Roboadvisor investment setups are discretionary in nature because the buy-sell-executions do not require approval from the clients. Financial Advisory firms and agencies can have their own model portfolios. But an interesting statistic was made known to me of late, that on average, whenever a broad call for switches are called for, 30% do not respond. So over time, there will be deviations from the model portfolio. And it will be unfair to cherry pick only portfolios that perform well to show to prospects.
PhillipCapital holds the Fund Management license to carry out this regulated activity. All the portfolio managers will have their investment performance tracked. Only with the results properly accounted for, then I can compare properly with publicized robofund performance.
Investment guidelines drawn up, mandates submitted, application made. Based on the image above, the model portfolio that I run will have UT, listed securities across geographical reach of PhillipCapital, and approved derivatives (Chief Investment Officer has to approve = Formal proper oversight). Deposits, well, default cash should sit in the Phillip Cash Management Account. Private Equity and Digital Assets are not within the mandate. Shorting the market will be allowed subjected to limits.
I have always been a proponent of the Adaptive Market Hypothesis and will run it such. The buck with stop with me, there will be watermarks to clear each year and there will not be, “You didn’t inform me… email mailbox full.. you didn’t respond…” type of conversations.
Choices - Not so much about pros, but dealing with the cons.
A very good friend of mine who has journalistic background once said to me, by observation, at the end of the day, people tend to make choice decisions on being able to deal with the tradeoffs that come with them. Generally, people understand that they cannot have everything.
The disadvantages of Discretionary Investment Management according to ChatGPT has been laid out as shown. I just think that it is part and parcel of the tradeoffs. At least you can utterly scold and hold accountable the investment manager. There is no lock-in period for what I am running. Appointments for tea or coffee to understand strategies and how the decisions come about, can always be arranged.
You know what I do, let me know how I can be of service.