Discretionary or Proposal-Acceptance Arrangement: who makes the final call?
The real difference between having a portfolio managed within a mandate and approving each trade yourself, and the trade-offs that come with each.
The main difference between discretionary investment management and a Proposal-Acceptance Arrangement is who has the final decision-making authority.
In discretionary management, the investment manager makes decisions on the client's behalf, within an agreed mandate, without seeking approval for each one. In a Proposal-Acceptance Arrangement, the client receives proposals but keeps the final say on every investment.
What a fast market shows
When markets move quickly, changing portfolios in response is natural. But a Proposal-Acceptance Arrangement responds with a delay.
In a fast-moving market, a Proposal-Acceptance Arrangement can run into any combination of these problems:
- The representative did not take any action.
- The representative did call for action, but the client did not respond, or responded late.
- With a long list of accounts to contact, some clients heard sooner than others. Some executions were early and some were late.
Portfolios then drift from the intended allocation by varying degrees, and conversations get messy: "Why you never inform me?" "I alerted you, but you never responded."
Proposal-Acceptance Arrangements have their purposes
Under a Proposal-Acceptance Arrangement, responsibility does not fall entirely on the firm or its representative. They must provide a reasonable basis for what they propose, and the client takes responsibility for accepting it. That is what people mean when they say "I'll take it as advice": the final decision rests with them.
Fund switch calls on investment-linked policies are a related case. The representative who arranged the policy is usually not contractually bound to watch over the investments. Those who do are acting out of goodwill, and the same response-time problems apply.
Response time is part of the result
Markets demand attention and monitoring, and inaction is also a decision. I have long thought that risk and return are not the full picture when choosing asset classes. A third axis is the monitoring effort.
For listed securities, hours and minutes count. A proposal should come with an expiry date. Not every client sits in front of a screen waiting for a prompt; some are busy, some overlook it, some forget. That timing is outside the representative's control. A friend in the industry has an assistant phone every client whenever a fund switch is called. That does not scale for everyone, and it was one reason I took on a fund management appointment in early 2023.
Robo-investing platforms work on the same principle: their trades do not need client approval. When some clients do not respond to a broad switch, over time accounts under Proposal-Acceptance Arrangements drift from the model they were meant to follow.
Choosing: it is about the cons
A friend with a journalism background once observed that people tend to choose based on which trade-offs they can live with. Weighing trade-offs openly is what the FDM method is for. Most understand they cannot have everything.
With discretionary management, you give up approving each trade, and a mandate may not fit every personal preference. In return, trades within the mandate do not wait for your reply, and one person is accountable for them; you can always arrange a coffee to understand the strategy and how decisions are made. With a Proposal-Acceptance Arrangement, you keep control, and you accept that your response time becomes part of the result, much as bet size is part of it. Neither removes investment risk.
Questions
What is a discretionary mandate?
A written agreement that sets what a portfolio manager may buy and sell for you, and within what limits, so trades inside it do not need your approval each time.
What does non-discretionary mean?
It means you approve each trade yourself. A Proposal-Acceptance Arrangement is one form of it.
Can I use both?
Yes. Part of a portfolio can be under a mandate and part under proposals, and the mix can change.
First published on isaacfang.com on 14 January 2023 as "Discretionary Investment Management & Choice". Shortened and reframed for this site; Isaac's own term "Proposal-Acceptance Arrangement" restored. Lightly edited for this site.