How Private Bank Discretionary Mandates Work: IPS, Benchmarks, Fees and Disputes

For high net worth individuals who do not wish to manage their own investments, discretionary portfolio management — where a private bank or wealth manager makes investment decisions on your behalf — is the standard solution. The mandate gives the manager authority to buy and sell within agreed parameters without seeking approval for each transaction.

Done well, discretionary management provides access to professional investment expertise, operational efficiency, and a disciplined investment process. Done poorly — or without sufficient client engagement — it can result in unsuitable portfolios, excessive charges, and disappointing outcomes that are difficult to challenge without a clear contractual framework.

Understanding how discretionary mandates work in practice is essential for any HNW investor engaging private banking services.

What Is a Discretionary Mandate?

A discretionary investment management mandate is a contractual arrangement under which the client delegates investment decision-making to the manager within agreed parameters. The key features:

• The manager selects investments, executes trades, and manages the portfolio without seeking client approval for individual decisions
• The mandate operates within parameters set out in the Investment Policy Statement (IPS) — the governing document for the relationship
• The manager owes a duty to act in the client's best interests within the IPS parameters
• Regular reporting keeps the client informed of portfolio activity and performance

Discretionary vs advisory: in an advisory mandate, the manager proposes investments but seeks client approval before acting. Discretionary management is more efficient for the manager and provides a cleaner process, but places a higher burden on the quality of the IPS to capture client requirements accurately.

The Investment Policy Statement (IPS)

The IPS is the foundational document of a discretionary mandate. It is typically several pages long and should cover:

Risk profile: a description of the client's risk tolerance and capacity for loss. This is usually expressed as a category (cautious, balanced, growth, aggressive) but should be supplemented by specific parameters — maximum drawdown tolerance, volatility expectations, minimum income yield if relevant.

Return objective: what the portfolio is expected to achieve. This should be specific: "preserve capital in real terms" is different from "achieve 5% per annum nominal return" or "match performance of the MSCI World Index."

Investment horizon: the time period over which performance should be assessed. Short time horizons and high return objectives are contradictory — the IPS should be internally consistent.

Liquidity requirements: whether capital needs to be available for specific purposes (a property purchase, a business investment, school fee payments) should be specified, as this affects the portfolio's investment universe.

Constraints and restrictions: preferences or requirements that the manager must follow — for example, no tobacco stocks, no fossil fuel exposure, religious investment screens, or concentration limits on any single stock.

Currency considerations: the base currency of the portfolio and any constraints on currency exposure.

Tax considerations: UK higher-rate taxpayer? Non-resident? In an offshore bond wrapper? The tax environment affects which investments and structures are appropriate. The IPS should capture relevant tax context.

The client should read, understand, and sign the IPS. This is not a formality — it is the document that governs the mandate and provides the benchmark for evaluating manager performance. If the IPS does not accurately reflect your requirements, the mandate cannot be correctly designed.

Benchmark Selection

Every discretionary portfolio should have a benchmark — a reference point against which performance is measured. Benchmark selection is surprisingly consequential and often not given enough attention by clients.

Common benchmark approaches:

Market index benchmarks: using established indices (MSCI World, FTSE All-World, Bloomberg Global Aggregate for bonds) provides a transparent, objective comparison. The benchmark should match the portfolio's expected composition — a mixed asset (balanced) portfolio cannot fairly be benchmarked against an equity index alone.

Blended benchmarks: a typical balanced portfolio might be benchmarked against 60% MSCI World + 40% Bloomberg Global Aggregate — a reasonable representation of a global balanced allocation.

Absolute return benchmarks: some mandates use an absolute return target (e.g., cash + 3% per annum) rather than a relative market benchmark. These are appropriate for mandates that explicitly prioritise capital preservation over market participation.

Inflation-linked benchmarks: CPI + X% benchmarks are appropriate where the primary objective is real wealth preservation.

Why benchmark selection matters: a manager who is measured against cash + 2% (an achievable hurdle in almost any market) will be evaluated very differently from one measured against global equity indices. Make sure the benchmark genuinely tests what the manager claims to do.

Fee Structures: Basis Points on AUM vs Flat Fees

Private banking fees are predominantly expressed as an annual management charge (AMC) on assets under management — quoted in basis points (bps), where 1 basis point = 0.01%.

Typical fee ranges:

Portfolio Size	Typical AMC
£250k–£500k	0.75%–1.25%
£500k–£1m	0.65%–1.0%
£1m–£3m	0.50%–0.80%
£3m–£10m	0.35%–0.65%
£10m+	0.20%–0.50% (negotiable)

What is typically included in the AMC:

• Investment management (portfolio construction, rebalancing)
• Custody (safe-keeping of assets)
• Reporting
• Client servicing

What is typically additional:

• Transaction costs (dealing commission on individual trades) — some managers charge these separately
• Third-party fund management fees — if the portfolio includes funds (collective investments), those funds charge their own ongoing costs (OCF)
• Foreign exchange transaction costs — spreads on currency conversion
• Performance fees — some mandates include a performance fee above a hurdle

The total cost of ownership should aggregate the AMC, underlying fund costs, transaction costs, and any performance fees. For a portfolio invested substantially in third-party funds, the total cost can be 1.5–2.5% or more per annum. This must be recovered by performance — a meaningful hurdle.

Flat fee alternatives: a small number of private banks and wealth managers charge flat fees (e.g., £15,000 per year for a £2 million portfolio) rather than percentage AMCs. For larger portfolios, flat fees are cheaper; for smaller portfolios, they may be disproportionate.

Performance Reporting: What Good Looks Like

Discretionary managers should provide regular performance reporting, typically quarterly. A good performance report includes:

1. Absolute return: portfolio return in absolute terms for the period and cumulatively
2. Benchmark comparison: return relative to the agreed benchmark
3. Attribution: what drove performance (asset allocation, stock selection, currency)
4. Portfolio composition: holdings, weights, and any significant changes since the last report
5. Transaction summary: trades executed during the period
6. Forward outlook: market commentary and positioning rationale
7. Charges: fees and costs deducted during the period

Red flags in reporting:

• Benchmark cherry-picking (reporting against a benchmark that was not in the IPS)
• Gross-of-fee returns presented without net-of-fee equivalents
• Attribution analysis that attributes underperformance to markets and outperformance to management
• Irregular or infrequent reporting

Clients should actively read and interrogate performance reports rather than accepting them passively. Questions to ask the manager annually:

• What is the net-of-all-fees return over three and five years?
• How does this compare to the benchmark?
• How does this compare to a comparable low-cost passive alternative?

Changing the Mandate

Circumstances change — your risk appetite, time horizon, income requirements, or personal situation may evolve in ways that require updating the IPS.

Initiating a review: at any time, you can request a mandate review meeting with your client relationship manager. Well-structured private banks should proactively suggest this at least annually. Changes to the IPS should be documented in writing.

Changing managers: leaving a discretionary mandate typically involves giving notice (30–90 days depending on the contract) and either transferring assets in specie (securities transferred to a new custodian without selling) or liquidating and transferring cash. In-specie transfers avoid forced sales and potential tax events; their availability depends on the receiving manager's platform compatibility.

Costs of switching: consider any exit fees (rare but check the contract), CGT on positions that need to be liquidated, and the time required for a new manager to build the portfolio to their chosen configuration.

Disputes and Complaints

When a manager underperforms or behaves in a way that seems inconsistent with the mandate, the complaint process is:

1. Direct complaint to the firm: all regulated firms must have a formal complaints process. The written complaint creates a formal record.
2. Financial Ombudsman Service (FOS): if the firm's response is unsatisfactory, eligible complainants (generally individuals and smaller businesses) can take the complaint to the FOS, which adjudicates complaints about UK financial services firms at no cost to the client.
3. Financial Services Compensation Scheme (FSCS): provides protection if a regulated firm becomes insolvent and cannot meet its obligations (up to £85,000 per firm per eligible client category for investment business).
4. Arbitration or litigation: for larger, complex disputes, specialist financial litigation solicitors are available. Damages in investment mandate disputes are typically measured as the difference between the actual portfolio outcome and what would have been achieved in a suitable mandate.

The strength of the IPS is critical in any dispute. A well-drafted IPS that accurately reflects the client's requirements, coupled with evidence that the manager deviated from those requirements, is the basis for a successful complaint.

How Global Investments Can Help

Global Investments helps clients evaluate, negotiate, and monitor discretionary investment mandates across private banks and wealth managers. We advise clients on IPS drafting, benchmark selection, fee negotiation, and performance assessment. For clients who have experienced disappointing outcomes in an existing mandate, we can provide an independent evaluation and, where appropriate, facilitate a move to a more suitable arrangement.

Discretionary investment management involves risk. The value of investments can fall as well as rise. Past performance does not indicate future results. This article is for general information only and does not constitute financial or investment advice. Always read the terms and conditions of any investment management agreement carefully before signing.