Topic 11 - Discretionary and Non Discretionary Portfolio Management Flashcards
What is portfolio optimisation and how is a portfolio optimised?
Using an optimisation model, what will the manager input into it?
What is backtesting?
Portfolio optimisation uses fundamentals of efficient frontier to manage assets to obtain highest return for given level of risk.
There will be a number of potential portfolios with varying risk, optimisation is finding the combinationt hat offers the lowest risk for the required return and lies on the effiicient frontier.
Manager will use in optimisation model:
- Returns from each asset class
- Risk / Standard Deviation from each asset class
- Correlation between asset classes using correlation matrix
Manager can use backtesting to see if investment rules worked based on historical data.
What disclosure and agreement information needs to be in place for Discretionary and Non Discretionary clients?
Non discretionary firms:
Initial disclosure Information about
- Status of regulation
- Type of advice
- Services offered
- How the firm is paid
- How to complain
- FSCS Coverage
Discretionary Firms
- Normal disclosure document
- Two way formal agreement
- Details of nominee services
- Where information such as trades, tax information and valuations to be sent
- Client’s residence information
- Client’s tax position, available allowances, CGT losses and whether manager to automatically use ISA allowances
- Attitude to risk
- Investment objectives
- Investment instructions and restrictions
- Investment timeframe
What are Nominee Accounts used for and what are the benefits?
What are the alternative options to nominee accounts?
- Discretionary advice normally uses nominee service
- Involves fund held by manager in nominee comapny
- Allows administration with assets as share dealing, dividend claimsand rights issue. More streamlined process and manager can act quickly.
- Client remains beneficial owner of assets and cash is ring fenced from corporate assets and held in client money trustee account
- Additional protection provided by FSCS
- Can now manage assets remotely through wrapper or platform which has benefit of easily creating valuation reports, dealing and switches that don’t incur a charge.
- Not used in non-discretionary advice as client makes final decision to invest and supplies the funds.
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What additional information is needed for a discretionary manager to meet the Know your customer rules?
In addition to normal factfind information, discretionary advice needs some extra information:
- Client confirmation of where information sent
- Anyone that can act on their behalf i.e accountant
- Residence & domicile information
- Tax position and allowances
- Objectives over various timescales
- Other instructions or restrictions
What additional charges may apply to Discretionary management services?
In addition to the annual management fee and any initial advice fee, the following may apply:
- Dealing charges
- Transaction costs for withdrawal
- Custody fees
- Valuation fees
- Banking Transaction fees
- Provision of tax packs
- Collective funds annual management fees
How often must periodic reports be provided to a discretionary client?
What does a periodic report mandatorarily include?
What may a periodic report contrain voluntarily?
What else apart from the periodic reports might a discretionary manager send to the client?
Periodic Reporting Requirement every 6 months but can be every three or twelve months depending on the structure of portfolio. Monthly if portfolio allows leverage.
Periodic reports kept 5 years. Include:
- the firm’s name;
- the name of clients account
- Statement with content of portfolio & valuation
- Investments held, market value
- Cash balance at start and end of period
- Portoflio performance during period
- Total charges and fees in period
- Any benchmark performance comparison
- Total interest, dividends and payments
- Other corporate actions that give rights to investments in portfolio
- May also include at discretion
- Collateral value reagrding contingent liability transaction.
- Any options held or sold in portfolio
Must also report any losses above preagreed threshold. No later that end of same business day.
Also likely to send annual tax report
What is a Fiduciary and some examples?
Someone appointed and authorised to hold, manage and protect assets for another in relationship of utmost trust and confidence.
- Legal guardians of infant beneficiaries;
- Solicitors and their clients;
- Trustees and the beneficiaries;
- Investment/asset managers and their clients.
What are the main responsibilities of a fiduciary?
- Act in interests of beneficiaries
- Carry out duties prudently, honestly, responsibly
- Act impartially
- Follow agreement, trust deed and rules
- Loyalty duty - shouldn’t conflict own self interest.
- Any benefit must be agreed prior to relationship
- All actions must have clear mandate and investment scope
- If unincorporated charity trustee then under Trustee Act 2000 can invest as if it was there own
