Asset Management, Portfolio Management and Advisory Services
This domain tests how discretionary portfolios are mandated, managed and reported, and how advisory obligations differ from dealing.
Licensing and conduct
Managing a discretionary portfolio is Type 9 (asset management); securities advice is Type 4, futures advice Type 5, and dealing Type 1 or 2. A licensed corporation needs at least two responsible officers, at least one an executive director. Type 9 firms must comply with the Fund Manager Code of Conduct, whose 2018 amendments added fund governance, liquidity risk management, disclosure of fees and expenses, and best execution obligations.
Portfolio management
An investment policy statement captures objectives, risk tolerance, time horizon, liquidity needs, tax position and legal constraints, and sets the benchmark and rebalancing policy. Performance is measured against that benchmark: the Sharpe ratio divides excess return by total volatility, (Rp − Rf)/σp, while the information ratio divides active return by tracking error, (Rp − Rb)/TE. Time-weighted returns strip out client cash flows and are the standard measure of manager skill.
Advisory and suitability
Under paragraph 5.2 of the Code of Conduct a recommendation must be reasonably suitable given the client's financial situation, investment experience, objectives, risk tolerance and, for derivatives, derivative knowledge. Solicited complex product transactions require a suitability assessment, with limited exemptions for professional investors and certain execution-only, non-complex transactions.
Worked example
A portfolio returns 12% against a benchmark of 10%, with a risk-free rate of 2%, portfolio volatility of 10% and tracking error of 4%. Sharpe = (12 − 2)/10 = 1.0. Information ratio = (12 − 10)/4 = 0.5. Strong absolute risk-adjusted return but only moderate active efficiency - show both calculations, because the exam often asks which ratio answers which question.
Fees
Management fees are charged on NAV. Performance fees need a disclosed benchmark, high-water mark or hurdle to avoid rewarding beta, and all charges must be clearly disclosed rather than offset through undisclosed soft-dollar arrangements.
Traps
- Assuming a Type 4 licence permits discretionary management.
- Using money-weighted returns to judge manager skill.
- Assuming a signed risk disclosure statement displaces the suitability duty.
- Confusing Sharpe (total risk) with the information ratio (active risk).
- Treating SFC authorisation as approval of the investment strategy.