Discretionary vs. Non-Discretionary PMS: Which Suits Your Needs?

2 Jan 2025 , 10:56 AM

Switching into the investment world is like entering a huge maze. Investors can relate if they’re in the process of choosing which portfolio management approach is best for them.

You get two options ahead of you: discretionary PMS or non-discretionary PMS. To make the most of your investment journey, you must make a smart decision between the two. Why? Because each approach has its pros and cons.

Today, we will walk these paths together and help you uncover the path that speaks to your financial aspirations and personal style when making investment decisions.

Decision-Making Authority

Discretionary PMS is when portfolio managers have the complete authority to execute trades without the client’s approval for each trade. On the contrary, nondiscretionary PMS involves the need for consent from the client before any investment decision is made, giving the investor more control over his portfolio.

Aspect	Discretionary PMS	Non-Discretionary PMS
Final Decision	Portfolio Manager	Client
Transaction Speed	Immediate	Depends on the client’s approval
Client Involvement	Minimal	High
Decision Framework	Pre-agreed strategy	Case-by-case basis

Time and Involvement Required

There is great variance in the time commitment involved with these approaches. Discretionary PMS lets investors get their hands off and let their portfolio manager do the job.

The difference is that discretionary PMSs don’t require clients to participate, while non-discretionary PMSs do demand clients to evaluate and approve each investment recommendation. This is particularly important for busy professionals or for those without the time to monitor markets.

Aspect	Discretionary PMS	Non-Discretionary PMS
Time Investment	Minimal	Substantial
Market Monitoring	Manager’s responsibility	Shared responsibility
Communication Frequency	Periodic updates	Regular consultation
Decision Timeline	Real-time	Variable

Market Opportunity Response

Investment outcomes can be highly dependent on the speed of execution. The discretionary PMS allows managers to act quickly on market opportunities by making decisions immediately. Client approval under a nondiscretionary PMS may delay execution, thereby losing time-sensitive opportunities. This becomes quite important when there is a volatile market.

Aspect	Discretionary PMS	Non-Discretionary PMS
Execution Speed	Immediate	Delayed
Opportunity Capture	Higher potential	May miss opportunities
Market Timing	More precise	Less precise
Volatility Response	Quick adaptation	Requires consultation

Investment Expertise Required

Note: Knowledge requirements differ when it comes to discretionary vs non-discretionary PMS.

Discretionary PMS suits investors who prefer delegating investment decisions to experienced professionals. Non-discretionary PMS works better for those with market knowledge who want to maintain control while receiving expert guidance. The choice often depends on your investment experience and willingness to learn about market dynamics.

Aspect	Discretionary PMS	Non-Discretionary PMS
Client Expertise	Not required	Beneficial
Learning Curve	Minimal	Steeper
Professional Input	Complete reliance	Advisory nature
Market Understanding	Optional	Necessary

Cost Structure and Transparency

Fee structures and transparency levels vary between services. Discretionary PMS typically charges a fixed management fee plus performance-based incentives.

Non-discretionary PMS often has lower base fees but may include transaction-based charges, reflecting the shared responsibility in decision-making. Understanding these cost implications is crucial for long-term investment planning.

Aspect	Discretionary PMS	Non-Discretionary PMS
Fee Structure	Higher base fees	Lower base fees
Additional Costs	Performance-based	Transaction-based
Cost Predictability	More predictable	Varies with activity
Hidden Charges	Minimal	May vary

Risk Management Approach

The handling of risk differs significantly between these services. In discretionary PMS, risk management is entirely handled by professional managers who implement pre-agreed strategies. Non-discretionary PMS allows clients to have direct input in risk management decisions, potentially leading to more personalised risk control but requiring a greater understanding of risk factors.

Aspect	Discretionary PMS	Non-Discretionary PMS
Risk Control	Professional-led	Client-influenced
Strategy Adaptation	Automatic	Requires approval
Risk Monitoring	Continuous	Shared responsibility
Portfolio Adjustments	Dynamic	Client-approved

Portfolio Customization Flexibility

While both services offer customisation, the approach differs markedly. Discretionary PMS typically offers broader strategy-level customisation at the outset, while non-discretionary PMS provides ongoing flexibility in individual investment decisions. This affects how personal preferences and changing circumstances can be incorporated into the investment strategy.

Aspect	Discretionary PMS	Non-Discretionary PMS
Customisation Timing	Initial setup	Ongoing
Strategy Changes	Periodic review	As needed
Investment Selection	Manager-driven	Client-approved
Personal Preferences	Pre-set guidelines	Regular input

Conclusion

Therefore, for investment, discretionary or non discretionary portfolio management depends upon your personal preferences, time availability, and investment expertise. If you prefer a hands-off approach with professional management, go for discretionary PMS. If you want to maintain control and take advantage of expert guidance, opt for non-discretionary PMS.