Portfolio Managers are discretionary, meaning they can make investment decisions on their client’s behalf fast and efficiently since they generally do not need to call their clients every time, they want to make an investment decision.
“They do this by creating an individual written agreement or Investment Policy Statement (IPS) with their clients to establish and set out how their clients will work with them, including ongoing communication, types of investments, reporting, fees, risks and other issues related to their clients’ own circumstances.”[1]
Having discretionary trading authority is important, especially during market volatility, where the advisor needs to adjust a client’s portfolio to protect them or to take advantage of a unique opportunity that presents itself.
In Canada, in order for an advisor in an SRO regulated organization, to make a trade-in your portfolio, they must call you first to discuss the trade and get your agreement to make the trade. In many cases, you must sign off on the transaction before the transaction can be made in your portfolio.
If you are not one of the top 10 people on the advisor’s list to get that phone call, your transaction is probably not done in a timely manner. For example, in a declining market, if the advisor recommends selling specific securities in their clients’ portfolios to avoid major losses, they start calling their top clients first. Each client is treated individually and in order of importance to the advisor or their availability to be reached.
Given that many successful advisors can have over 1,000 clients, it can take weeks before the advisor can reach, meet, and suggest transactions for all their clients. The reverse also happens in a recovering market. When unique investment opportunities arise, the advisor must contact all their clients to make the transaction. Guess who gets called first and last?
This can’t happen with a Portfolio Manager (PM). They are subject to what is called the “Fair Dealing Standard.” Under the fair dealing standard, Portfolio Managers must make the same changes to all their client’s portfolios at the same time and for the exact same price. All clients must be treated equally.
“Under the Fair Dealing Standard Portfolio Managers must deal fairly and objectively with all clients when providing investment analysis, making investment recommendations, taking investment action, or engaging in other professional activities.”[2]
In order to comply with the fair dealing standard, a Portfolio Manager must have discretionary authority to make investment trades in all their clients’ portfolios at the same time without having to get their clients to sign off on the transaction first.
This ability allows the Portfolio Manager to maneuver efficiently and promptly to protect their client’s portfolios in a Down Market and to take advantage of investment opportunities in Up Markets. Since Portfolio Managers can make discretionary investment decisions on behalf of all their clients at the same time, their clients are treated equally and fairly, regardless of how much a client has invested with the PM. This discretionary process results in consistent portfolio returns for ALL clients.
Many IIROC firms employ advisors that call themselves Portfolio Managers and have the Chartered Investment Manager (CIM) designation. Many of these advisors may not have discretionary trading authority, because every time they make a trade recommendation on behalf of their client, they must get approved by a Chartered Financial Analyst (CFA) employed at the firm’s head office, usually in Toronto. These trades can take up to a day for approval, and because each trade must be approved for each client, they are not timely.
In contrast, a Discretionary Portfolio Manager has the authority to make discretionary trades on behalf of all their clients at the same time without having to call their clients individually to make the trade. This way, all trades are done promptly, and all clients, regardless of size, are treated equally.
Most financial advisors are not Discretionary Portfolio Managers. They do not have the knowledge or access to integrated and comprehensive wealth management services.
So how do you find a Discretionary Portfolio Manager?
Good question!
I cover this extensively in my book Who’s Investing Your Money? – 7 Key Questions to Ask Your Financial Advisor. This book examines the various types of advisor registrations, their limits and abilities and will help you find the right advisor for you.
To learn more about how a Discretionary Portfolio Manager can better help you, please call me at (604) 855-6846 or email me at aspitters@pfcwealthsolutions.com
Who’s investing your Money? is available as a free PDF download at www.whosinvestingyourmoney.com
Alternatively, the book is available from Amazon.ca as a paperback and Kindle version from this link: Who’s Investing Your Money? – Amazon
[1] “What Is A Portfolio Manager? – Pmac.” Portfolio Management Association of Canada. N.p., n.d. Web. 12 Jul. 2019 https://pmac.org/nav-investor-info/selection-checklist/
[2] “Standard III(B) Fair Dealing.” CFA Institute, https://www.cfainstitute.org/en/research/multimedia/2018/professional-conduct-standard-IIIB-fair-dealing.
