What is Discretionary Fund Management?

What is discretionary fund management?

A Discretionary Fund Manager or ‘DFM’ exercises their professional discretion to buy and sell investments on your behalf.

A discretionary management service can deliver highly tailored investment portfolios based upon your individual circumstances and objectives.

This is in contrast, to an advisory mandate in which you, as the client, are asked to approve recommendations in advance.

Discretionary fund managers argue that their autonomy enables them to:

✔ Rapidly react to market conditions
✔  Outperform benchmarks
✔  Provide highly bespoke solution
✔  Demonstrate individual expertise in stock picking
✔ Re-balance whenever required

Discretionary fund management is viewed as a traditional way of managing investments, generally with an individual investment manager or committee responsible for investment decisions. A discretionary fund manager often holds individual securities likes stocks and bonds but also funds and derivatives.

A discretionary fund manager normally offers greater visibility of what the underlying investments are. For example, there might be 30 different stocks, and 10 different bonds in the portfolio, and any report produced will tell you about the performance of all of them. With a fund or ETF portfolio, you will get less information about the underlying investments instruments.

Why has my financial adviser recommended a DFM?

Over recent years, the use of an international Discretionary Fund Manager by traditional offshore IFAs has become popular for several reasons:

These international IFAs have traditionally produced dismal results for their clients by offering poorly constructed and high cost mutual funds, structured products and UCIS funds inside expensive and opaque insurance bonds.
Having failed to get results (because of the huge amount of commission they extracted), they first turned to multi-managers and developed a growing appetite for the outsourcing of investment decisions – the investment ‘’magic.’’
Due to the high combined costs of these financial salespeople, the conventional tax wrappers (offshore bond or QROPS) they recommend and the total expense ratios of the funds, overall performance remained poor and they now need a new approach which sounds plausible to clients.
Traditional international financial advisers/salespeople are poorly qualified and resourced to offer professional investment services. An increasing number, have concluded that outsourcing investment decision making to a competent third party is probably in the best interests of themselves and the client. Overseas, they can secretly share in the revenue that is generated from this and have less work for themselves.
Glossy brochures, upmarket sounding names, long reports and ‘market outperformance’ appeal to all the senses which make most of us all such poor investors. It's an easy concept to ‘sell’ to investors who don’t look into the detail and are flattered by being able to access ‘the big name’ wealth managers.
Since the Retail Distribution Review brought along high regulatory standards in the UK, DFMs have had to disclose their charges. These often compare poorly with other options and hence many UK based DFMs have tried to focus on overseas markets where the full expenses do not need to be disclosed.
The prestige and perceived security attached to using a DFM, with the perception of a bespoke service, traditional expertise and good visibility of investments has proved popular with wealthy individuals, who feel the tailored service is worth the premium it carries.

Does a Discretionary Fund Manager work?

Often not. AES do not usually advocate the use of a DFM because there is a substantial amount of scientific evidence which suggests their active approach to investment simply does not work.

What is the difference between discretionary and non-discretionary portfolio management?

The main difference between discretionary and non-discretionary portfolio management lies in the level of control the investor has over decision-making.

In discretionary portfolio management the portfolio manager has the authority to make investment decisions on behalf of you as the client, in line with your investment objectives and risk profile, without needing to discuss with you each trade or decision. This is more suited to investors who prefer to delegate the decision-making process and don't want to be involved in day-to-day decisions. This approach is now seen as generally outdated in the financial advice market.

In non-discretionary portfolio management, the portfolio manager provides advice and recommendations to you, but you retain the final decision on whether or not to act on those recommendations. This type of management is suitable for investors who want professional input but still want to make the ultimate decisions about their portfolio.

In short, discretionary gives the manager full control over the portfolio's decisions, while non-discretionary allows the investor to make the final call after receiving advice.

In the international environment, this method of investment can also be very expensive, opaque and convoluted

Cost is accentuated in the international marketplace where financial salespeople often resist direct custody by a DFM so they can hold the assets on a platform (such as an offshore bond) from which they can extract extra hidden establishment and management commission.

This is signposted by the fact that clients are advised on separate pension products or insurance bonds from a range of offshore life insurance companies.

When coupled with additional fees, such as platform or product charges, the benefits of a more sophisticated portfolio might be lost.

When judged on performance, DFMs fall into the same category as any other active investment managers, that is, they fail to consistently outperform the market and thus struggle to justify the expense incurred.

In most cases, a well-constructed passive investment portfolio will produce better results and give you the benefit of financial planning advice alongside the investment management services for a total expense ratio below that of an international discretionary fund manager service.

When should I use a discretionary fund manager?

1. Complex requirements

We would only recommend considering a DFM where a client has highly complex requirements.

2. Legacy products

If you have been ‘orphaned’ and left holding legacy products with no active financial adviser.

3. Low cost passive solutions

Only consider if low cost passive solutions are part of the Discretionary Fund Management service.

Which is the best international discretionary fund manager?

Our verdict is that while a direct DFM is far better than a financial salesperson alone (if they are well run), on the whole they are too expensive and simply don’t work.

We suspect that many traditional DFMs maintain the traditional status quo of the financial services industry.

This means they pay huge salaries to private client investment managers and investment ‘gurus’ to promise results which it has been scientifically proven simply don’t come.

This money comes from your returns and we suspect that technological change (given computer beat man as far back as 1997) and the increasing mountain of evidence against active performance, will soon re-shape this marketplace.

Popular UK based DFMs include Brewin Dolphin, Cazenove Capital Management, Rathbones, Rothschilds, Smith and Williamson, Seven Investment Management, Walker Crips.

Popular international discretionary fund managers include Aria, Brooks Macdonald International, Nedgroup Investments, Newport Private Wealth, Quilter Cheviot and TAM Asset Management.

The truth is that you can have the best DFM in the world, but if the access to this manager is commission based international IFA or through an expensive platform, your returns net of charges may still be depressing…

If you have an existing DFM and would like to discuss the total charges of your investments, the performance against benchmarks and how your asset allocation compares please contact us.

How discretionary investment management works

In discretionary investment management, the portfolio manager is trusted with the authority to make investment decisions on behalf of the client. This means the manager has the discretion to buy, sell, and adjust the portfolio as they see fit, without needing to discuss individual decision.

The portfolio manager's decisions are based on an understanding of the client’s investment objectives, risk tolerance and time horizon. The manager uses their knowledge and market insights to manage the portfolio.

Benefits of discretionary management

'Expert' management

You get the benefit of a professional with the expertise to make informed decisions and navigate market fluctuations. If you’re looking for expert financial investment advice, a financial adviser in Dubai can guide you in making these important choices.

Time-saving

The manager handles all decisions, so you don't need to spend time managing your investments.

Objective decisions

Professionals make choices based on data, not emotions, helping avoid impulsive decisions during market volatility.

Personalised strategy

Your portfolio is tailored to your financial goals and risk tolerance. For a deeper dive into financial planning in Dubai, our comprehensive guide can provide the roadmap you need.

Active management

The manager continuously monitors and adjusts the portfolio as they see fit.

Risks of discretionary management

Loss of control

You give up some control over individual investment decisions, as the manager handles everything.

Manager risk

The success of your portfolio depends on the manager's expertise and their own recognition of this—poor decisions can negatively affect returns.

Higher costs

Discretionary services usually come with higher opaque fees, which can reduce your overall returns.

Over-reliance on the manager

You may become too dependent on the manager, their perceived skill and neglect to monitor your actual performance.

Limited transparency

Since the manager makes decisions on your behalf, you may have limited insight into the rationale behind specific trades.

Discretionary
Fund Management

Discretionary fund managers use professional discretion to buy and sell investments