Discretionary Investment Management Explained

How a Discretionary Mandate Works

A discretionary mandate hands the trading decisions to the manager. Once the agreement is signed, the firm decides what to buy, when to sell and when to rebalance, and you find out afterwards from its statements. UK law treats that as a regulated activity in its own right: article 37 of the Regulated Activities Order 2001 covers "managing assets belonging to another person, in circumstances involving the exercise of discretion". A firm running a mandate therefore needs FCA permission to manage investments. On an advisory account nothing moves until you say yes, whereas under a mandate your earlier signature is the yes.

Suitability still applies to every single trade. Article 54(2) of the MiFID Organisational Regulation, in the UK version in force until 22 October 2025, applies the suitability test to "the specific transaction... entered into in the course of providing a portfolio management service". Article 54(10) goes further and forbids a manager to "decide to trade where none of the services or instruments are suitable" for the client. Holding cash can therefore be the compliant choice. Trading for its own sake, when nothing on offer suits the client, breaks that rule as well as running up dealing costs. The mandate sets the outer fence, and the manager's freedom ends exactly where its written limits end.

Discretionary vs Advisory vs Execution-Only Investing

Who presses the button is the cleanest way to tell the three service models apart. Each model hands the decision to a different party, and the suitability duty follows whoever recommends or decides.

Non-discretionary is the industry's other name for advisory management. It suits investors who want a veto, but a veto has a price: if you are abroad or unreachable during a sell-off, an advisory portfolio stays exactly as it was. A discretionary manager can act without waiting for you. We think the honest test is behavioural. If you would phone about every trade, pay for advice rather than discretion, or look at the lighter regulated help described under targeted support.

Execution-only leaves every decision, and every mistake, with you. A complaint there usually concerns how the order was handled, since nobody assessed whether the investment was right for you in the first place.

Suitability Rules for Discretionary Managers Under COBS 9A

Three tests decide whether a discretionary portfolio is suitable. Chapter COBS 9A of the FCA Handbook holds the suitability rules for MiFID business. The detail below quotes Article 54 of the MiFID Organisational Regulation as it stood before the UK revoked that regulation on 23 October 2025, and this page has not matched each paragraph to its new COBS 9A rule number. A manager must hold enough information to judge three things:

1. Objectives. The portfolio must meet your investment objectives, including your risk tolerance, how long you want to hold the money and what it is for.
2. Financial capacity. You must be able to bear the related investment risks financially, consistent with your objectives, so the firm needs a real picture of your money.
3. Knowledge and experience. You must have enough knowledge and experience to understand the risks involved in the management of your portfolio, which is a wider question than understanding each product on its own.

Professional clients lose part of this protection. Article 54(3) lets a firm assume a professional client's knowledge and experience, but it allows the firm to assume financial capacity only when it gives investment advice to certain professional clients, so a discretionary manager still has to establish that point. Switching gets its own rule too. Under Article 54(11), a firm moving a client between investments must analyse the costs and benefits of the switch.

Your risk profile is the document every later trade is measured against, so ask for a copy at the outset and update it when your time horizon changes. Article 47 then requires the agreed objectives and risk level to be written into the client information itself.

What to Check in a Discretionary Investment Management Agreement

Five disclosures must reach you in good time before the service starts, under Article 47(3), now carried in COBS 6.1ZA.8R according to the FCA's derivation table in policy statement PS25/13. Each one becomes a yardstick for a later complaint, so compare all five with the draft agreement before you sign:

• Valuation method. The firm must explain how the holdings in your portfolio are valued and how often that valuation is carried out.
• Delegation. Where discretionary management of all or part of your portfolio has been handed to another firm, the details of that delegation must be disclosed.
• Benchmark. Any benchmark against which the performance of your portfolio will be compared must be specified before the mandate starts.
• Permitted investments. The types of financial instruments the manager may hold, and the types of transactions it may carry out, must be listed with any limits.
• Objectives and risk. The management objectives, the level of risk the manager may take and any specific constraints on its discretion must be written down.

Article 47(2) also requires an appropriate method of comparison, such as a meaningful benchmark, based on your objectives and the types of instruments in the account. A cautious income mandate measured against a global equity index would fail that test.

Gaps in the template are where disputes start. The Article 47(3) list says nothing about the custodian, exit charges or whether you can leave by transferring holdings in specie instead of being sold into cash. Ask for all three in writing. Write in any exclusions as well, such as a legacy shareholding you will not sell, because a preference that never reached the written mandate gives you nothing to cite in a complaint. Costs and charges come with their own disclosure regime, separate from this list.

Discretionary Investment Management Fees, Charges and VAT

Discretionary investment management fees must be disclosed as one aggregated total, "expressed both as a cash amount and as a percentage", under Article 50(2). PS25/13 kept Article 50 in its current form at COBS 6.1ZA.14R, pending new disclosure rules. The total combines the manager's own charges with the costs of the funds and other products inside the portfolio. Article 50(9) then requires annual ex-post information on all costs and charges actually incurred, personalised to your account. Article 50(10) adds a cumulative cost illustration. It shows how costs reduce your return, both in the advance estimate and in the after-the-event figures. Since 26 July 2021, Article 50(1A) has excused professional clients from this regime except for investment advice and portfolio management, so even professional discretionary clients receive the full breakdown.

Investment trusts dropped out of the total on 22 November 2024. From that date the costs of manufacturing and managing shares in a UK-listed closed-ended investment company were excluded from aggregation. A portfolio built partly from investment trusts can therefore report a lower aggregated figure than the same strategy run through open-ended funds. Check which vehicles the manager uses before comparing two quotes.

VAT applies to the management fee. HMRC's VAT Finance Manual, updated on 27 November 2025, says initial, annual and performance charges for discretionary management carry VAT at the standard rate, and transaction charges are caught too where trading is bundled into the same service, following the Deutsche Bank judgment (C-44/11). The standard rate is 20%. A fee quoted as 1% plus VAT therefore costs 1.2% a year, or £3,000 rather than £2,500 on a £250,000 portfolio. The annual cost figure arrives with your periodic statements, and the rules on those statements changed twice between October 2025 and January 2026.

Portfolio Statements and the End of the 10% Drop Letter

Every three months is the standard frequency for a retail client's portfolio statement, under Article 60(3), which now sits at COBS 16A.4.1R. Three exceptions change that rhythm:

• Online access. No quarterly statement is required where the firm runs an online system with up-to-date valuations and has evidence you viewed a valuation at least once in the quarter.
• Borrowing. Where the agreement authorises a leveraged portfolio, the statement must arrive at least once a month instead of once a quarter.
• Trade-by-trade reports. Clients who elect to receive information on each executed transaction must still get a full statement at least once every 12 months.

Each statement has to show the total fees and charges for the period, itemising at least total management fees and total execution costs. It must also compare performance with the benchmark, if one was agreed, and that comparison is only as useful as the benchmark written into the agreement.

The 10% drop letter no longer exists. PS25/13, published in October 2025, deleted COBS 16A.4.3UK, the rule requiring firms to tell a retail client when a managed portfolio fell by 10%, with effect from 23 October 2025. The same policy statement made electronic communication the default from 12 January 2026, although firms must tell retail clients upfront that paper copies are available. A sharp fall now triggers no automatic warning. Set your own price alerts on the portal, or diarise a check after any market shock. Statements describe what the portfolio holds, while the question of what happens when the firm itself fails belongs to the FSCS.

FSCS Protection for Discretionary Portfolios

£85,000 per eligible person, per firm is the most the Financial Services Compensation Scheme pays on investment business for firms that failed after 1 April 2019, according to the FSCS investments page checked on 5 November 2026. The limit was £50,000 for firms that failed between 1 January 2010 and 31 March 2019.

Market losses are never covered. The FSCS states that it "can't accept any claims that are for poor investment performance". Cover applies instead where a provider fails and there is a shortfall in the money or assets it held for you, or where bad advice from a failed firm caused the loss.

The limit is counted per firm, so the identity of the custodian matters as much as the name of the manager. Ask which legal entity holds your assets and cash before you sign. Deposit limits, joint accounts and ombudsman awards are set out on our page about investor protection. One real discretionary manager has already tested these rules, and its name is close to this site's domain.

What Happened When Facet Investment Management Failed

Facet Investment Management Ltd entered administration on 23 August 2024, according to the FCA notice published on 4 September 2024. The FSCS describes the firm, FRN 131372 and formerly Financial Advisors to Consultants Engineers and Technologists Ltd, as a "regulated wealth management and independent financial planning firm, which specialised in providing discretionary managed services". Two insolvency practitioners from Voscap Ltd were appointed joint administrators, the FCA notice says.

The case shows how a delegated chain works in practice. Some Facet clients received advice from Berkeley Financial Partners, an appointed representative of Facet, so the brand they dealt with and the regulated firm answerable for the advice carried different names. The FCA said Voscap would assess the investments held with the firm and contact customers within 8 weeks of its appointment. It also warned that complaints against Facet might become creditor claims that the firm could not pay in full.

Claims now go through the FSCS. Its Facet failed-firm page gives a failure date of 15 July 2025, takes claims through its online service and states that claiming is free, with no need for a representative or solicitor. The FCA advised former clients to be cautious about claims management companies and to hang up on cold callers claiming to be from Facet or Voscap.

facet-im.co.uk is not Facet Investment Management Ltd, its administrators or the FSCS, and it cannot handle claims. Anyone who held a Facet portfolio should deal only with the FSCS and Voscap, using contact details from their official pages.

How to Check a Discretionary Manager on the FCA Register

Search the Financial Services Register before you sign a discretionary investment management agreement. The FCA describes it as "a public record of firms, individuals and other bodies" that are, or have been, authorised by the FCA or the PRA, which means a firm with a past entry can appear even if it no longer holds permission. Work through five checks:

1. Status. Confirm the authorisation is current, not historic, and that the legal entity on your agreement matches the entity on the entry.
2. Permission. Look for the permission to manage investments, since a firm authorised only to arrange deals or give advice cannot run a discretionary mandate.
3. Contact details. The FCA's ScamSmart page, which now calls the consumer search Firm Checker, says to "always use the contact details on the Firm Checker" rather than those you were sent.
4. Appointed representatives. If an adviser works under a principal's authorisation and goes beyond the principal's permitted activities, the FCA warns you may lose Financial Ombudsman Service and FSCS protection.
5. Warnings. Check the FCA Warning List of unauthorised firms, and call the FCA on 0800 111 6768 if the entry shows no contact details.

Each field on an entry is explained step by step on our page on how to check a firm on the FCA Register. Clone firms pretend to be authorised firms, so a matching name and FRN prove little on their own, and the contact details held on the register are the part of the check a fraudster cannot edit.