Discretionary Funds: Investment Power In Your Hands

Discretionary fund management is a form of investment management where a qualified financial professional, known as a discretionary fund manager (DFM), makes investment decisions on behalf of their clients. This involves delegating the authority to buy, sell and hold investments to the DFM, who acts within agreed parameters without seeking approval for each transaction. The DFM tailors their investment strategies to the client's financial goals, risk tolerance and investment horizon, aiming to optimise returns and mitigate risks. While the client surrenders direct control over individual investment decisions, they can still see exactly what is being done with their money and how the DFM is performing against their agreed targets.

Discretionary investment management vs non-discretionary investment management

Discretionary investment management and non-discretionary investment management are two distinct approaches to investment management, each catering to different investor needs and preferences. Here is a detailed comparison between the two:

Discretionary Investment Management:

In discretionary investment management, investors hand over full control of their investment portfolio to a professional money manager or a team of experts. These money managers are granted the authority to make investment decisions on behalf of the investors without seeking approval for each trade. This approach is suitable for investors who prefer a hands-off approach and want to delegate the day-to-day management of their portfolio to experts. Discretionary investment management is often referred to as an outsourced Chief Investment Officer (OCIO) model.

One of the main advantages of discretionary investment management is the quick execution of trades and expert services. Advisors can act swiftly on market information, making cost-effective transactions for multiple clients at once. Additionally, the discretionary model minimizes the lag between recommendation and implementation, which can be crucial in volatile markets. It also provides daily oversight of assets, enabling greater responsiveness, especially in a lower-return environment.

However, a potential disadvantage of discretionary accounts is the higher fees associated with employing a fund manager or advisor. There is also the risk of negative performance, as investors give up direct control over their investment decisions.

Non-Discretionary Investment Management:

Non-discretionary investment management, on the other hand, provides investors with more control over their investment decisions. In this approach, the investor decides on what trades to make, while the broker acts as a facilitator, executing the client's requested trades and providing recommendations. Brokers managing non-discretionary accounts must receive prior approval from the investor before making any trades.

Non-discretionary investment management is ideal for investors who prefer a hands-on approach and want to actively participate in the decision-making process. It allows investors to maintain control over their investment choices and have a say in the portfolio's composition.

One advantage of non-discretionary accounts is that investors can ensure their investment decisions align with their specific goals and constraints. However, a potential drawback is the time it takes to execute trades, especially if swift action is required in response to sudden market shifts.

Choosing the Right Approach:

The choice between discretionary and non-discretionary investment management depends on an investor's goals, risk tolerance, and preferred level of involvement. Discretionary management suits those seeking a passive role, while non-discretionary management is for those wanting a more active role in investment decisions. Cost is also a factor, as discretionary management typically comes with higher fees due to the involvement of fund managers or advisors.

Who discretionary fund managers are

Discretionary fund managers (DFMs) are qualified financial professionals who manage their clients' investment portfolios. They are responsible for developing and executing investment strategies that align with their clients' financial goals and risk tolerance. This involves conducting thorough market research, selecting appropriate assets, and continuously monitoring the performance of the portfolio.

DFMs have the authority to make investment decisions on behalf of their clients, including buying, selling, and holding various financial assets. This delegation of decision-making is a key feature of discretionary fund management, with the manager operating within the constraints of the client's pre-agreed investment strategy and risk profile.

The role of a DFM is particularly important for investors who do not wish to be involved in the day-to-day investment decisions, instead relying on the manager's expertise and market knowledge. A good DFM upholds high ethical standards, ensuring transparency in all investments and always acting in the client's best interests.

DFMs can offer either a 'managed' or 'bespoke' service. Managed discretionary fund management involves predefined investment models or strategies, catering to a broad range of investors. In contrast, bespoke discretionary fund management offers a higher level of customisation, with each portfolio individually tailored to meet the client's needs, preferences, and circumstances.

The fees for discretionary fund management services typically include an ongoing charge, calculated as a percentage of the assets under management (AUM), as well as transaction fees and, in some cases, performance fees.

Overall, discretionary fund managers play a crucial role in wealth management, providing expert knowledge and ensuring that their clients' investment portfolios are actively managed to optimise returns and mitigate risks.

The role of a discretionary fund manager

Discretionary fund managers (DFMs) are qualified financial professionals who manage their clients' investment portfolios. They are granted the authority to make investment decisions, including buying, selling, and holding various financial assets, on behalf of their clients.

• Developing and executing investment strategies that align with the client's financial goals, risk tolerance, and circumstances. This includes conducting thorough market research, asset selection, and continuous portfolio monitoring.
• Adapting investment strategies in response to market changes or shifts in the client's situation.
• Upholding ethical standards, ensuring transparency, and always acting in the client's best interests.
• Keeping clients informed about their investment portfolio, market developments, and any changes to the investment strategy.
• Ensuring compliance with relevant laws and regulations, identifying and mitigating risks, and providing regular reports on the portfolio's performance.
• Staying updated with market trends, economic changes, and regulatory developments to offer informed advice and management.

DFMs offer a dynamic approach to wealth management, optimising returns and mitigating risks in an evolving financial landscape. They cater to clients who prefer not to be involved in day-to-day investment decisions, instead relying on the manager's expertise and market knowledge.

Advantages and disadvantages of discretionary fund management

Discretionary fund managers (DFMs) are investment professionals who have the power to make investment decisions on behalf of their clients. They are tasked with maximising returns and managing risk in line with a client's goals, time horizon, and financial situation.

Advantages of Discretionary Fund Management

DFMs bring a high level of expertise and experience in financial management, which is particularly beneficial for inexperienced investors who may lack the confidence or ability to make investment decisions on their own. This expertise can lead to smarter investments and larger rewards. Additionally, DFMs can provide access to a wider range of investment options, including alternative asset classes, and can categorise clients into portfolios based on their strategy and risk appetite. This allows managers to complete trades for multiple investors simultaneously, ensuring everyone has access to the best deals.

DFMs also save time for advisers, who can then focus on their core competencies, such as financial planning and strategy. Outsourcing to a DFM can reduce the risk of running an advice business and make a firm appear more substantial by linking it to a larger investment group.

Disadvantages of Discretionary Fund Management

One of the main drawbacks of DFMs is the potential conflict of interest. As DFMs aim to make money for their company and bonuses for themselves, there may be a disconnect from the hopes, aspirations, and fears of individual clients. This can result in a loss of control for advisers, who may face challenges in moving a DFM portfolio if they are unhappy with its performance.

DFMs can also be costly, with high management fees that may prove prohibitive for some investors. The value added by DFMs is uncertain until proven over time, and data has questioned the value offered by many managers, suggesting that a significant proportion fail to provide any real value for clients.

Additionally, regulatory requirements for offering discretionary services can be challenging in terms of license approvals, education, experience, and firm capital adequacy. Compliance is another key issue, as managers are given a lot of responsibility and their decisions could be harmful to clients if misused.

How to choose between a managed and bespoke discretionary fund manager

Discretionary investment management is a form of investment management where a professional fund manager makes investment decisions on behalf of the client. The term "discretionary" refers to the fund manager's authority to make these decisions without seeking the client's approval for each transaction. This means that the client must have a high level of trust in the fund manager's capabilities and expertise.

When choosing between a managed and bespoke discretionary fund manager, it is important to understand the key differences between the two services:

Managed Discretionary Fund Management

• Predefined Investment Strategies: Managed discretionary fund management offers predefined investment models or strategies based on varying risk tolerance levels and investment objectives. These models are designed to cater to a broad range of investors.
• Efficiency: This approach provides efficient portfolio management with a one-size-fits-many strategy. It is well-suited for investors who seek a cost-effective solution and streamlined decision-making.
• Limited Personalisation: Managed discretionary fund management offers limited personalisation in terms of individual client preferences. It is suitable for investors who are comfortable with a standard approach and do not require extensive customisation.

Bespoke Discretionary Fund Management

• Highly Personalised: Bespoke discretionary fund management offers highly personalised investment strategies tailored to the unique needs, preferences, and circumstances of each client.
• Broad Considerations: This type of management considers a wide range of factors, including total assets, specific income needs, tax implications, ethical investment preferences, and more.
• Direct Communication: Bespoke discretionary fund management involves more direct and detailed communication between the client and the fund manager to ensure that the investment strategy aligns with the client's circumstances.

The choice between managed and bespoke discretionary fund management depends on your unique requirements, financial goals, and the complexity of your financial situation. If you have straightforward investment objectives and are comfortable with predefined strategies, managed discretionary fund management may be suitable. On the other hand, if you have complex financial needs and prefer a highly customised approach, bespoke discretionary fund management may be the better option.

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