The service of individual portfolio management allows investors to take advantage of the knowledge and experience of professionals in selecting the financial instruments in which to invest and in executing the related transactions.
Investors may intervene directly in the performance of the management service by giving the manager binding instructions in accordance with previously agreed procedures.
The riskiness of a management investment strategy is reflected in the variability of the earnings achieved by the manager.
Investors may influence the riskiness of the management service by contractually setting the limits bounding management choices. Taken together, these limits define the nature of a management investment strategy and must be set out in the written contract.
However, the effective risk of a management investment strategy depends on the choices the intermediary makes. While these must remain within the contractual limits, there is usually a wide margin of discretion with regard to which securities are to be bought and sold and when transactions are to be executed.
Intermediaries must explicitly indicate the riskiness of each management investment strategy.
Investors should obtain detailed information from their intermediary about the features and riskiness of the management investment strategy they intend to select and should conclude the contract only if they are reasonably certain they understand the nature of the investment strategy and the exposure to risk it entails.
Once the riskiness of a management investment strategy has been assessed, before concluding the contract the investor and the intermediary must determine whether the investment is appropriate, with special reference to the investor's net assets, investment goals and experience in investing in financial instruments.
1 The riskiness of a management investment strategy
Investors can influence the riskiness of a management investment strategy principally by establishing:
a) the categories of financial instrument in which their funds may be invested and the limits for each category;
b) the degree of leverage that can be used.
1.1) Financial instruments that may be included in a management investment strategy
With regard to the categories of financial instrument and the evaluation of the risk they entail for investors, see the part of this document concerning the measurement of the risks associated with investments in financial instruments. The risk characteristics of a management investment strategy tend to reflect the riskiness of the financial instruments in which investments may be made and
their proportions in the portfolio.
For example, a management investment strategy which provides for a significant percentage of the portfolio to be invested in low-risk securities will have similar risk characteristics, whereas one that allocates a relatively small percentage of the portfolio to low-risk investments will have a higher overall level of risk.
1.2) Leverage
The maximum leverage of a management investment strategy must be established in the management contract. Leverage is represented by a number equal to or greater than one.
It should be noted that a leverage of one is to be considered appropriate for many investors since in this case it does not influence theriskiness of the management investment strategy.
Leverage, in short, is the multiple by which an intermediary may increase the value of the financial instruments held under management for a customer with respect to the latter's own funds. Increasing the leverage increases the riskiness of the management investment strategy.
Intermediaries can increase the leverage by resorting to loans or agreeing with counterparties to settle transactions on a deferred basis, or else by using derivative financial instruments (where this is contemplated by the management investment strategy -- see Part B of this document).
Before a maximum leverage greater than one is selected the investor and the intermediary must evaluate its appropriateness in relation to the investor's characteristics and investors must:
a) indicate in the management contract the maximum amount of losses beyond which the intermediary is required to restore the leverage to one (i.e. close the financed positions);
b) understand that the higher the leverage, the larger are the changes that may result from small movements in the prices of the financial instruments included in the managed portfolio, and that the portfolio's value may diminish considerably in the event of adverse movements in the prices of such instruments;
c) understand that a leverage greater than one may lead, in the event of negative management results, to losses in excess of the assets entrusted for management and consequently that they could end up indebted to their intermediary.
2 Other general risks connected with the service of portfolio management
2.1) Reminder
In supplying portfolio management services intermediaries carry out transactions in financial instruments on their customers' behalf. Investors are therefore advised to become acquainted with the information presented in Parts A and B of this document.
2.2) Commissions and other charges
Before signing a management contract investors should obtain detailed information regarding all the commissions (and the manner of calculating them), expenses and other charges payable to the intermediary. This information must in any case be stated in the investment service contract. In evaluating the appropriateness of portfolio management commissions, investors should bear in mind that
tying commissions directly or indirectly to the number of transactions could increase the risk of the intermediary carrying out unnecessary transactions.
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Receipt (to be kept by the intermediary)
I the undersigned (name and surname of the investor) hereby attest that I have received a copy of the document on the general risks of investments.
Place and date Signature of the investor
