Discretionary and Advisory Mandates: Who Decides What

A discretionary mandate authorises the manager to act without asking. An advisory mandate authorises the manager to recommend, and leaves the decision with the holder. The written constraints can be identical in both. The difference is who can make the portfolio comply. An advisory mandate therefore cannot promise that a crossed limit will be restored on any particular day.

Two people can be handed the same portfolio, the same objective, the same range and the same single holding cap, and end up running two different things. Neither is doing the job badly. The difference is one clause about who is allowed to place a trade.

The running example is the Anantara Multi-Asset Portfolio, an invented discretionary mandate of Rs 500 crore run by Faiz Ahmad Ansari for an invented charitable endowmentA permanent pool of money whose capital is meant to last, with spending drawn from what it earns. whose investment committee is chaired by Rukmini Deshpande. Its stated shape is equity 60.0 per cent at Rs 300 crore, fixed income 30.0 per cent at Rs 150 crore and cash 10.0 per cent at Rs 50 crore, summing to Rs 500 crore exactly. The mandate permits equity anywhere between 50 and 70 per cent, allows no single holding above 5 per cent, admits no unlisted holdings, and sets a minimum credit standing on the fixed income sleeveA named portion of a portfolio held for one purpose, reported and limited as a block. as a policy rather than as a rating symbol. Every one of those lines could be copied into an advisory document without changing a syllable, and the comparison is worth running for exactly that reason.

One boundary first. Advisory portfolio management as a service, and the regulated portfolio management service as an arrangement, are settled earlier in this subject area. The narrower question here is the one the document answers: who may act without asking, and what must come back to Rukmini Deshpande's committee before anything moves. The service question is who does the work. The mandate question is who decides.

Both arrangements exist for an endowment with a committee and for a single household with a savings pot, and none of the arithmetic below depends on which. Every figure below is a shape rather than a client type, and a household with a savings pot reaches the same shape on smaller numbers.

What does a discretionary mandate actually transfer?

A discretionary mandate transfers a decision, not a workload, and that distinction is the whole of the idea. A holder who signs a discretionary mandate has not hired somebody to do the tiring parts of investing and report back for approval. The holder has handed over the moment of choosing, inside written limits, and kept the right to read about it afterwards and to change the limits for next time.

Faiz Ahmad Ansari may sell a holding on Tuesday morning because he thinks it should be sold, and Rukmini Deshpande will learn about it in the next report. He does not need her agreement. He does not need her to be reachable. He needs the trade to sit inside the mandate. The transfer is one of decision authority rather than of effort, and the holder who grants it has not delegated work, they have delegated the choosing itself.

The everyday version. A household hands one person the monthly grocery budget and a short brief: no meat, stay under Rs 12,000/-, use judgement on the rest. The shopper buys what seems best and shows the bill on Sunday. The other version of the same household calls home from the shop before every item goes into the basket. Both households eat. Only one has delegated anything, and it is the one that finds out afterwards.

Discretion is not licence. Every discretionary decision still has to land inside the equity range, under the single holding cap, above the credit standing and away from anything unlistedNot traded on a stock exchange, so no daily market price exists and a sale means finding a buyer.. The mandate is what makes discretion reviewable. Remove the written limits and there is nothing to check the manager against except opinion. An opinion is not a check.

What does an Advisory Mandate authorise, and what does it withhold?

An advisory mandate authorises the manager to do everything except the last inch. Analysis, monitoring, sizing, the specific instruction, the reasoning behind it, the timing: all of that belongs to the manager. Placing the trade does not. Under this arrangement Faiz Ahmad Ansari would produce a recommendationA proposed change complete enough to act on: what to buy or sell, how much, and why. and then wait, and the portfolio would stay exactly where it was until Rukmini Deshpande's committee said yes.

The withheld part is narrow and total. Not judgement, not information, not skill: execution authority. Because a portfolio only changes when a trade is placed, withholding execution authority withholds the change itself. Withholding execution authority makes the holder a necessary participant in every alteration to the portfolio, and that is a standing workload as much as it is a right.

An architect surveys the site, draws the extension, specifies the beam, prices the work and states exactly what to do. She cannot lay a brick until the owner signs. A month away, and the drawings are still perfect and the house is unchanged. The quality of the advice and the state of the building are two different facts, and only the second is the one lived in.

One honest gap sits under every later measurement of acceptance. The invented record states the traded value for the stated twelve months but not how many separate recommendations produced it. How much of a manager's advice was taken can therefore only be measured as a share of rupees, never as a count of separate items. A share measured in items and one measured in rupees are different numbers, and mixing them is a base error.

Discretionary vs Advisory Portfolio Management: what actually differs?

Side by side on day one the two documents are hard to tell apart. Same holder, same Rs 500 crore, same three sleeves at 60.0, 30.0 and 10.0 per cent, same equity range, same 5 per cent single holding cap, same exclusion of unlisted holdings, same minimum credit standing. A reader comparing constraint lists would conclude, correctly, that they constrain the portfolio identically.

Then comes the operative verb. The verb is the whole comparison. The documents can be word for word identical except in whether the manager shall maintain a limit or shall recommend what is required to maintain it, and that single change of verb reorganises everything downstream. It changes who acts, how fast, whose diary the portfolio depends on, what the performance record is measuring, and what a written promise about the range is worth.

The advisory wording converts an obligation about the portfolio into an obligation about the manager's output. Under the first version, equity at 71 per cent is a breached mandate and the manager breached it. Under the second, equity at 71 per cent with a recommendation to sell sitting unread on the committee's table means the manager has done what the document requires. The portfolio is outside its range and nobody is in breach. The consequence follows honestly from moving the verb, and is not a drafting trick.

A discretionary record is a record of one party's decisions; an advisory record is a record of two parties interacting, and the two cannot be laid side by side as though they measured the same quantity, however similar the digits look.

How much authority is that, in rupees?

Most conversations about mandates go soft at exactly this point. Somebody says the manager has wide discretion, or a tight mandate, and everybody nods. Wide and tight are adjectives, and an adjective cannot be minuted or compared against last year's version of the same document. Describing a mandate as granting wide discretion is a sentence, and computing what the range and the cap permit is a figure, and only the second can be put in front of a committee and argued with.

So compute it. Equity may sit anywhere between 50 and 70 per cent of Rs 500 crore. Fifty per cent is Rs 250 crore. Seventy per cent is Rs 350 crore. The corridor is therefore Rs 100 crore wide, and Faiz Ahmad Ansari may move equity exposure anywhere inside it without any approval. The Rs 100 crore corridor is the delegation, stated properly.

Rs 100 crore needs a base. Against the Rs 500 crore portfolio it is 20.0 per cent, a fifth of everything the endowment has. Against the Rs 300 crore equity sleeve it is 33.3 per cent. Both are true and they answer different questions. The same figure sounds modest against one denominator and startling against the other, so the base has to be said out loud each time.

The single holding cap is the second half of the delegation. Five per cent of Rs 500 crore is Rs 25 crore, so any one name may reach Rs 25 crore on Faiz Ahmad Ansari's own authority. The record's largest holding is Rs 23 crore, 4.6 per cent of the portfolio and 7.7 per cent of the equity sleeve, leaving Rs 2 crore of headroom before the cap bites. Two percentages for one holding, and neither is wrong.

Faiz Ahmad Ansari may move a fifth of the portfolio between asset classes, take any single name to Rs 25 crore, and replace holdings inside the twenty eight name equity sleeve. He may not change the range itself, lift the cap, buy anything unlisted, or lower the credit standing. Because those four are changes to the document rather than decisions taken under it, they require Rukmini Deshpande's committee under both arrangements.

One more figure measures the authority as used rather than as granted. The invented record shows portfolio turnover of 34 per cent over the stated twelve months, and 34 per cent of Rs 500 crore is Rs 170 crore of traded valueThe rupee amount bought or sold over a period. It measures activity, not gain or loss., so about a third of the portfolio was replaced during the year, and under the discretionary mandate every rupee of it was placed on Faiz Ahmad Ansari's own authority.

Who restores a crossed limit, and when?

One difference survives every attempt at drafting. A limit can be crossed without anybody doing anything wrong: nobody buys more equity, nobody changes their mind, nobody breaches an instruction. Equity simply goes up in price faster than the other two sleeves, and one morning the weight is at the ceiling.

Take the invented Anantara mandate at the moment equity reaches 70.0 per cent with the other two sleeves unchanged at Rs 150 crore and Rs 50 crore. The two unchanged sleeves together are Rs 200 crore. If Rs 200 crore is 30 per cent of the whole, then the whole is Rs 200 crore divided by 0.30, or Rs 666.67 crore. Equity at 70.0 per cent of that is Rs 466.67 crore. The exact total does not terminate, so every figure here is rounded at the second decimal place of a crore.

Now the restoring trade. Sixty per cent of Rs 666.67 crore is exactly Rs 400 crore, so returning equity to its 60.0 per cent policy weight means holding Rs 400 crore of it. The sale is Rs 466.67 crore less Rs 400 crore. The difference is Rs 66.67 crore, or Rs 66,66,66,667/- to the nearest rupee. The Rs 66.67 crore is the equity leg only; bringing fixed income and cash back to 30.0 and 10.0 as well is the rebalancing question, covered separately.

Why exactly 10.0 per cent? Because the sale is the weight gap expressed in rupees. Equity is at 70.0 per cent and the target is 60.0, so the gap is 10.0 percentage points, and a trade closing a 10.0 point weight gap is 10.0 per cent of the portfolio whatever the portfolio is worth that day. The rupee figure moves with the market. The share does not.

One trade has now produced two honest percentages, so the base has to be named again. Rs 66.67 crore is 10.0 per cent of the Rs 666.67 crore portfolio and 14.3 per cent of the Rs 466.67 crore equity sleeve. A committee told the trade is a tenth of the portfolio and a committee told it is a seventh of the equity book are hearing about the same instruction.

Everything above is identical under both arrangements: the crossing happens the same way, the arithmetic gives the same answer, the trade is the same size. Only the next step differs. Under discretion Faiz Ahmad Ansari places the Rs 66.67 crore sale on the day he notices, and Rukmini Deshpande reads about it in the next report. Under advice he writes a recommendation, sends it, and the portfolio stays on its ceiling until the committee says yes.

So a clause promising that the portfolio will remain inside its equity range is making two different promises depending on which document it sits in, and under an advisory mandate the person who can act is not the person who decides. The limit has not been weakened, the drafting has not been sloppy, and nobody has misbehaved. Compliance restorationBringing a portfolio back inside a limit it has drifted outside. simply requires a hand on the trade, and only one of the two arrangements puts that hand next to the person watching the weight.

The missing figure is the length of that wait. The record locks the portfolio, the weights, the range and the traded value, and carries no dates and no response times at all. So the time an advisory portfolio would sit on its ceiling cannot be read off it, and any plausible looking number put in its place would be made up rather than measured.

Where do the two records begin to come apart?

Assume for the rest of this section that the advice is identical: same ideas, same sizes, same days. The assumption is unrealistic and deliberate. Stripping out every other difference leaves acceptance as the only thing still moving. If the two records still diverge, the divergence cannot be blamed on the advice.

Under the discretionary mandate the year produced Rs 170 crore of traded value. Put the identical stream of ideas through an advisory mandate and the traded value becomes whatever share the holder accepts. At full acceptance it is Rs 170 crore and the two portfolios are the same object. At seven tenths it is Rs 119 crore. At one half, Rs 85 crore. At nil acceptance it is Rs 0/- and the portfolio is what it was in January.

Stay on the seven tenths row. Rs 51 crore of activity happened in one portfolio and not in the other, from advice that never differed by a word. The Rs 51 crore is more than half of the Rs 100 crore corridor the mandate delegates, and it arrives purely as a by-product of which recommendations somebody got round to approving.

Two things about that control. At full acceptance the visible difference between the arrangements vanishes: both bars read Rs 170 crore, the gap is Rs 0/-, and anybody comparing traded value alone would call the two the same. And the compliance register underneath does not care about the average. A limit is restored by one specific decision, so an advisory holder with a high overall acceptance rate can still be sitting on a crossed limit, and the traded value will not show it.

Now the part that cannot be undone. Suppose seven tenths of the advised value was accepted and the year turned out well. Whose result is that? The advice was the manager's; choosing which advice to take was the holder's. The portfolio is the product of both, and it contains only the accepted part.

Partial acceptance therefore produces a joint recordA history produced by two parties together, one proposing and one agreeing., and attributing it to either party alone is wrong in a way that cannot be corrected afterwards. Not difficult or expensive: impossible. The information needed to split it was never captured by the portfolio that records the result.

What does each arrangement ask of the holder?

Both arrangements ask for something, and the two asks are different shapes. Discretion asks for one hard stretch of work done once, before anything starts: a document good enough to constrain somebody who will be acting without asking. A limit nobody wrote down constrains nothing, and nobody stands between the manager and the trade to catch the omission.

Advice asks for something smaller and endless. Attention. Availability. A reply. The schedule is not the holder's to set. Recommendations arrive when markets move rather than when the committee has a free Thursday. The advisory ask looks like keeping control and is also a standing obligation to keep responding, so it is routinely underestimated.

Anybody who has renovated a house knows both shapes. A contractor on a fixed brief means an evening of hard thinking followed by months of not being phoned; a call before every decision basis costs a year of interruptions, and the day a call is missed is the day the tiles arrive in the wrong colour. Neither is better. The two are different lives, and people choose one while imagining the other.

The middle clause carries a word worth pinning down. EscalationA written rule sending an unanswered matter elsewhere after a stated period, so silence is not a decision. is what stops silence turning into a decision. Without escalation, an unanswered recommendation and a considered refusal look exactly alike in the portfolio. The joint record's problem has arrived one document earlier.

Where are the obligations for each arrangement published?

Everything above is mechanism: arithmetic about weights and a count of the people who have to agree before a trade goes in, and it holds wherever the mandate is written. The set of obligations attaching to whoever runs each arrangement is a separate matter.

Registration, conduct, disclosure and record keeping obligations attaching to each kind of arrangement are published by the Securities and Exchange Board of India at sebi.gov.in. Specific limits change, so a requirement repeated from anywhere other than the source may already have moved, and a reader acting on a stale threshold is worse off than one sent to look it up.

How does an investment committee use this on a Tuesday?

Three lines on one sheet, prepared before the meeting. The worth of the delegation in rupees. The ceiling on any single name. The value actually placed on the manager's authority over the last period. A committee that can read those three has reviewed a delegation. A committee that has read the mandate and nodded has approved one without knowing its size.

Rukmini Deshpande's committee would read Rs 100 crore of movable equity exposure, Rs 25 crore as the ceiling on any single name, and Rs 170 crore placed without an approval over the stated twelve months. The fourth line, how many items came back for approval, is not in the invented record, and a committee sheet with an honest blank is more useful than one with a plausible number.

None of this needs an endowment. Scale the shape down to a household with Rs 20,00,000/- of savings and the same 50 to 70 per cent equity range. The corridor runs from Rs 10,00,000/- to Rs 14,00,000/-, so whoever holds the discretion may move Rs 4,00,000/- without asking. That Rs 4,00,000/- is 20.0 per cent of the whole, the same fifth as the endowment's. The shape of a delegation is set by the width of the range and not by the size of the portfolio, so an institutional worked instance teaches a household as well.

When does the difference stop mattering?

Three conditions make the choice genuinely irrelevant. The first is a holder who accepts everything put to them: take the control above to full acceptance and both bars read Rs 170 crore, the gap is Rs 0/-, and the two arrangements have produced the same portfolio. The second is a mandate written so tightly that discretion has nowhere to go. Replace the 50 to 70 per cent equity range with 59 to 61 and the corridor falls from Rs 100 crore to Rs 10 crore, 2.0 per cent of the portfolio rather than 20.0, and there is almost nothing left to do with the authority. The third is a portfolio whose decisions arrive rarely enough that waiting for consent costs nothing. A committee that sits before every decision leaves no interval for a crossed limit to fall into.

Under any one of those three the two arrangements produce the same portfolio, and the choice between them becomes a question about paperwork.

A fourth condition is often set beside them and does not belong there. A holder who cannot be reached inside the window a decision needs is not the difference disappearing. An unreachable holder is the difference at its sharpest: the discretionary portfolio is back inside its range that day, and the advisory one sits at 70.0 per cent until somebody answers.

And these conditions expire without announcing themselves. A holder accepts every recommendation for two years and then declines the one that happens to be the Rs 66.67 crore sale restoring the equity range. Nothing in the document changed that morning. The condition keeping the difference invisible simply stopped holding, and the only record of it is a portfolio outside a limit it set for itself.