This guide explains the critical elements of discretionary fund management, explores who can benefit most, and examines the various strategies that discretionary fund managers (DFM) employ.
We aim to provide you with a thorough understanding of discretionary fund management to determine if it can play a crucial role in your wealth management.
What You Will Learn
- The role of discretionary fund management in modern investing.
- How discretionary fund managers (DFMs) make decisions for clients.
- Differences between Managed and Bespoke DFM services.
- Regulatory frameworks ensuring secure DFM investments.
- Fee structures and their impact on investment returns.
What Is Discretionary Fund Management
Discretionary fund management – also known as discretionary investment management – is a form of investment management where investment decisions are made by a professional fund manager on your behalf.
Unlike traditional investment services, in discretionary fund management, you delegate the authority to buy, sell, and hold investments to your discretionary fund manager (DFM).
Discretionary fund management allows the fund manager to act within agreed parameters without seeking your approval for each transaction.
A discretionary fund management service is designed for fund managers to tailor their investment strategies based on your financial goals, risk tolerance, and investment horizon.
Discretionary investment management encompasses comprehensive portfolio management, including ongoing monitoring, performance analysis, and regular adjustments to align with changing market conditions and your objectives.
This dynamic aspect of wealth management ensures that your portfolio is actively managed, aiming to optimise returns and mitigate risks in an ever-evolving financial landscape.
Discretionary fund management does not mean you are giving up full control of your portfolio. It's not entirely passive. If you hire a discretionary fund manager, you will delegate the execution of an agreed-upon investment strategy to someone with the right investment skills and experience. You can see exactly what is being done with your money and how they are performing against your agreed target.
Iain Ramsey
Chief Investment Officer
What Is a Discretionary Fund Manager?
A discretionary fund manager (DFM) – also known as a discretionary investment manager – is a qualified financial professional managing a client’s investment portfolio.
They have the authority to make investment decisions on behalf of the client, including buying, selling, and holding various financial assets.
This delegation of decision-making is a hallmark of discretionary fund management, wherein the manager operates within the constraints of the client’s pre-agreed investment strategy and risk profile.
The role of a discretionary fund manager is significant for investors who prefer not to be involved in day-to-day investment decisions, relying instead on a professional’s expertise and market knowledge.
Role of a Discretionary Fund Manager
The role of a discretionary fund manager encompasses several vital functions:
- They are responsible for developing and executing investment strategies that align with your financial goals and risk tolerance.
- To do this, they conduct thorough market research, asset selection, and continuous portfolio monitoring.
- They adapt investment strategies in response to market fluctuations or changes in your circumstances.
Responsibilities of a Discretionary Fund Manager
A good discretionary fund manager’s responsibilities should go beyond investment decision-making.
They should uphold the highest ethical standards, ensuring transparency in all investments and always maintaining your best interests. This includes:
- Keeping you informed about your investment portfolio, market developments, and any changes to your investment strategy.
- Ensuring all investment activities comply with relevant laws and regulations.
- Identifying and mitigating risks associated with portfolio investments.
- Produce comprehensive reports that regularly evaluate the portfolio’s performance against set benchmarks and your objectives.
- Staying updated with market trends, economic developments, and regulation changes to provide informed advice and management.
A discretionary fund manager looks after people's investments over time and across multiple generations. Our clients will move from the accumulation phase in their 40s to active retirement in their 60s and a passive pension in their 80s. They will want different strategies along the journey, and a discretionary fund manager can achieve that with an evolutionary approach. That means our regular review process is integral to the Titan Wealth International service.
Iain Ramsey
Chief Investment Officer
What Is The Difference Between Managed and Bespoke Discretionary Fund Management
When discussing discretionary fund management, it’s important to distinguish between ‘Managed’ and ‘Bespoke’ services, as they cater to different investor needs and preferences.
Managed Discretionary Fund Management Service
Managed discretionary fund management is where your portfolio is managed according to predefined investment models or strategies.
These models are created based on varying risk tolerance levels and investment objectives. They are designed to cater to a broad range of investors.
In managed discretionary fund management, you will choose a model that aligns closely with your goals and risk profile, and the fund manager then manages your portfolio according to the selected model.
Key features of managed discretionary fund management include:
- Predefined investment strategies based on risk categories.
- Efficient portfolio management with a one-size-fits-many approach.
- Limited personalisation in terms of individual client preferences.
Bespoke Discretionary Fund Management Service
Bespoke discretionary fund management offers a higher level of customisation. Each portfolio is individually tailored to meet your needs, preferences, and circumstances.
Bespoke discretionary fund management considers a broader range of factors, such as your total assets, specific income needs, tax considerations, ethical investment preferences, and more.
This type of management is particularly suited for high-net-worth individuals or those with complex financial situations.
Key features of bespoke discretionary fund management include:
- Highly personalised investment strategies tailored to you.
- It considers your unique circumstances, such as tax implications, ethical preferences, and specific income requirements.
- More direct and detailed communication between you and the fund manager.
The choice between the two depends on your unique requirements, financial goals, and the complexity of your financial situation.
How Does Discretionary Fund Management Work
Discretionary fund management operates on a model where individual investors entrust the management of their investment portfolios to professional fund managers.
This process is defined by either a bespoke or managed approach tailored to meet your financial goals, risk tolerance, and investment preferences.
- You will have an initial consultation, where the discretionary fund manager gains an in-depth understanding of your financial situation, investment objectives, and risk appetite.
- They then recommend a managed or bespoke discretionary fund management investment strategy.
- You will then grant the fund manager the discretion to make investment decisions on your behalf within the agreed-upon parameters of this strategy.
- The discretionary fund manager actively manages your portfolio once the mandate is established. This includes selecting, buying, and selling stocks, bonds, and other assets.
- The discretionary fund manager is responsible for continuously monitoring the market and adjusting the portfolio in response to market movements and economic changes.
- The discretionary fund manager regularly reviews the portfolio’s performance against your goals and investment benchmarks. This ongoing evaluation may lead to strategy adjustments to ensure alignment with your objectives and the market conditions.
Regulation and Compliance In Discretionary Fund Management
The legal and regulatory landscape for discretionary fund management is comprehensive, covering a range of national and international laws and regulations designed to protect investors and maintain financial stability.
Understanding the Legal Framework
Discretionary fund managers operate under a complex legal environment with national and international regulations.
Key legislations such as the Financial Services and Markets Act (FSMA) in the UK and regulations from bodies like the Financial Conduct Authority (FCA) set the standards for financial practices.
Internationally, regulations such as MiFID II (the EU’s Markets in Financial Instruments Directive) also play a significant role.
These laws and regulations govern financial services, from operational conduct to client communication and reporting requirements.
DFMs must adhere to these legal frameworks diligently to ensure full compliance.
Compliance Requirements for Discretionary Fund Managers
Discretionary fund managers must adhere to various compliance requirements, including accurate reporting, transparent communication, and upholding specific ethical standards.
One of the critical aspects of compliance is maintaining transparency in all dealings and adhering to fiduciary duties.
This means putting the client’s interests first, providing clear information about investments, risks, and charges, and avoiding conflicts of interest.
Impact of Regulations on Client Relationships
Compliance ensures investment decisions are made with due diligence, transparency, and in the client’s best interest.
It plays a vital role in building and maintaining trust, the foundation of a healthy client-manager relationship.
Regulations require DFMs to regularly assess the suitability of their advice and investments for each client, further cementing this trust.
Navigating Through Regulatory Changes
The regulatory environment for discretionary fund management can often change with new laws and amendments frequently introduced.
Staying updated on these changes is crucial for DFMs to ensure ongoing compliance and adapt their strategies and operations accordingly.
Understanding the impact of new laws and regulations is essential for DFMs to remain compliant and competitive in the market.
Advantages and Disadvantages of Discretionary Fund Management
Employing a discretionary fund manager offers several benefits, but it also comes with certain drawbacks.
Understanding these pros and cons is vital for investors considering discretionary fund management services.
| Advantage | Disadvantage | |
|---|---|---|
| Expertise and professional management | Discretionary fund managers offer expert knowledge in financial markets, investment strategy, asset allocation, and risk management, which is crucial for effective portfolio management. | Higher fees for discretionary fund management services can impact overall investment returns. |
| Automatic rebalancing and strategic investment allocation | Discretionary fund managers actively engage in automatic rebalancing to maintain the desired asset allocation, ensuring that the portfolio stays aligned with strategic investment goals. | Investors relinquish direct control over individual investment decisions, which might not suit those who prefer to be more involved. |
| Agile market responses | Discretionary fund managers are equipped to make quick, informed decisions, allowing for agile responses to market fluctuations. This can be pivotal in capitalising on market opportunities or avoiding potential pitfalls. | There’s a possibility that the manager’s investment choices may not always align perfectly with the client’s expectations or risk appetite. |
| Auto-Pilot portfolio management | The DFM takes over the day-to-day management of investments, putting the portfolio on ‘auto-pilot’. This approach is particularly beneficial for investors needing more time or desire to manage their investments closely. | Some DFMs might implement complex strategies that are difficult for clients to understand. |
| Time-Efficient | Employing a DFM saves significant time for investors, as the manager handles all research, monitoring, and decision-making related to the portfolio. | The portfolio’s success relies heavily on the fund manager’s skill and decision-making. |
| Customised investment strategies | Each investor’s portfolio can be tailored to their unique financial goals, risk tolerance, and investment horizon, ensuring a highly personalised approach. | Given the inherent unpredictability of financial markets, there exists a significant risk that the investment manager may fall short of achieving their benchmark performance. |
| Access to a wider range of investments | Investors gain access to a broader spectrum of investment opportunities, some of which may be beyond the reach of individual investors. | |
| Maximised returns | Through expert management and strategic allocation, DFMs aim to maximise returns relative to the level of risk taken, considering the client’s investment objectives. | |
| Economies of scale | Clients have the opportunity to combine their capital, benefiting from economies of scale through reduced trading fees and the ability to participate in block trades. |
Investment Strategies Used by A Discretionary Fund Manager
Discretionary fund managers employ various strategies tailored to their client’s needs.
We provide an insight into their methods, focusing on asset allocation, risk management, investment approach selection, and portfolio monitoring and rebalancing.
Collectively, these strategies ensure that client investments are managed effectively, aligning with specific financial goals and risk preferences.
Asset Allocation Strategies
Asset allocation is a fundamental strategy used by discretionary fund managers to keep the balance between risk and return in an investment portfolio.
This involves distributing investments across asset classes such as equities, fixed income, real estate, and commodities.
The allocation is based on the client’s risk tolerance, investment goals, and market conditions.
Discretionary fund managers use models to determine and adjust the optimal asset mix in response to changing market dynamics and client objectives.
Risk Management Strategies
Discretionary fund managers implement a variety of techniques to mitigate risk while aiming to achieve desired investment outcomes.
These strategies include diversification across different asset classes and geographic regions, using derivatives for hedging purposes, and setting stop-loss limits to protect against significant market downturns.
They also continuously assess market volatility and liquidity risks to make informed decisions that align with their client’s risk profile.
Investment Approach Selection Criteria
Selecting the right investment approach is crucial for a discretionary fund manager.
This fund manager will evaluate various investment philosophies and methodologies. Their selection will be influenced by factors like market trends, economic forecasts, and the manager’s expertise.
The chosen approach must align with the client’s investment goals, timescale, and risk tolerance.
Portfolio Monitoring and Rebalancing Practices
Portfolio monitoring and rebalancing are integral practices in discretionary fund management.
Fund managers regularly review portfolios to ensure they align with the client’s objectives and risk profile.
This involves monitoring market trends, economic indicators, and the performance of individual investments.
Rebalancing is used to regularly readjust the portfolio’s asset allocation or respond to significant market movements to maintain the desired risk-return profile.
This proactive approach helps in capitalising on market opportunities and mitigating potential risks.
Who Should Use a Discretionary Fund Manager?
Working with a discretionary fund manager is particularly beneficial for certain investors based on their needs, financial goals, and personal circumstances.
The people who might consider using a discretionary fund manager are:
- High-net-worth individuals.
- Retail investors.
- Expats.
- Retirees.
- Individuals who inherit wealth.
High-Net-Worth Individuals
Individuals with substantial wealth often find discretionary fund managers helpful due to the complexity and size of their investment portfolios.
High-net-worth individuals need more time and expertise to manage their investments effectively and can benefit from a professional’s expertise.
Titan Wealth International offers a bespoke investment portfolio service that can be tailored specifically to your needs.
For example, you may want to invest only in companies that strongly focus on environmental, social, and governance (ESG) initiatives. Your discretionary fund manager would avoid weaponry, tobacco, and fossil fuel energy companies.
Retail Investors
Retail investors are everyday investors who do not possess significant capital compared to high-net-worth individuals.
The discretionary fund manager will set up several investment vehicles with a tailored strategy to fit groups of investors based on risk preferences.
For instance, a discretionary fund manager might establish a mutual fund dedicated to blue-chip stocks, catering to investors seeking stable returns and lower volatility. Such a fund is ideal for those prioritising capital preservation and perhaps nearing or in retirement.
Additionally, a DFM could create a mutual fund that concentrates on emerging market equities. This fund is designed for investors with a higher risk appetite and an interest in diversifying their portfolio with global market exposure.
Titan Wealth International’s managed investment portfolio service provides five different models with varying risk levels in three major currencies (GBP, USD, and EUR).
Retirees
A discretionary fund manager could help you maintain and grow your retirement savings if you are already retired.
This can be important for individuals who rely on investment income for their day-to-day retirement expenses.
Expatriates
As an expat, you may face unique financial and tax implications in your host country.
A discretionary fund manager who understands these challenges can be valuable in managing your investments across different jurisdictions.
Individuals Who Inherit Wealth
People who inherit substantial wealth might suddenly find themselves responsible for managing more assets than they can handle.
A discretionary fund manager can provide the necessary guidance and management.
Book Your Complimentary Call
In this 15 minute call with Titan Wealth International’s investment specialists, you will:
- Get quick answers to your investment questions.
- Gain insights into market trends and outlooks.
- Learn how our discretionary fund management service fits into your financial, tax, and estate planning.
What are Discretionary Fund Management Fees, and How Much Do They Charge?
Discretionary fund management fees are charges that investors pay to DFMs to manage their investment portfolios.
These fees are for making investment decisions on behalf of the investor, including buying, selling, and monitoring assets.
The fee structure can vary depending on the fund manager and the services provided but typically includes the following components:
Management Fee:
This ongoing charge is calculated as a percentage of the assets under management (AUM). It typically ranges from 0.5% to 2% per annum.
The exact percentage can depend on factors such as the portfolio size, the investment strategy’s complexity, and the level of service offered.
Performance Fee:
Some discretionary fund managers charge a performance fee, a percentage of the investment profits. This incentivises the manager to perform well but can add to the overall cost if the investments do well.
These fees are often structured around a ‘high water mark’ principle, ensuring that managers are only rewarded for net increases in portfolio value.
Transaction Fees:
Transaction fees are charges incurred each time the manager buys or sells investments.
While some managers include these costs in the management fee, others may charge them separately.
Additional Costs:
Additional costs include administrative fees, custody fees (for holding the investments), and other operational expenses. Some funds also charge an entry or exit fee for investors joining or leaving the fund.
On average, discretionary fund management’s total expense ratio (which includes management fees and additional costs) can range from 1% to 3% of the AUM annually.
However, this can vary widely based on the factors mentioned above. For example, high-net-worth individuals might negotiate lower fees due to the larger size of their investments.
You should carefully consider these fees in the context of your investment goals and expected returns, as high fees can significantly impact your long-term investment growth.
Titan Wealth International’s Discretionary Fund Management Service
At Titan Wealth International, we understand the importance of aligning investment solutions with individual client needs. This understanding is reflected in our structured approach to investment services.
Our Managed Portfolio Service (MPS) caters to a diverse array of investment requirements, while our Discretionary Fund Management (DFM) is an integral part of the Bespoke Investment Portfolio Service for more complex financial scenarios.
Why a Managed Portfolio Service Is the Preferred Choice for Many
Our Managed Portfolio Service is the preferred choice for a vast majority of our clients due to its:
- Streamlined Decision-Making: MPS offers a range of predefined investment models that align with various risk appetites, making investment decisions efficient and straightforward.
- Cost-Effectiveness: It provides a cost-efficient solution for professional portfolio management, appealing to a wide range of investors.
- Professional Expertise: The MPS benefits from the oversight of our experienced investment professionals, ensuring high-quality management.
- Adaptability to Risk Profiles: With models tailored to different risk tolerance levels, MPS aims to optimise returns relative to each client’s risk preference.
- Consistent Monitoring and Rebalancing: Regular reviews and adjustments ensure that MPS portfolios meet their intended investment objectives consistently.
The Specialised Role of Discretionary Fund Management
Our Discretionary Fund Management service, a specialised offering within our Bespoke Investment Portfolio Service, caters to clients with unique and complex financial requirements, such as:
- Ultra-High-Net-Worth Individuals: Clients with portfolios typically starting at £10 million seeking advanced wealth management solutions.
- Advanced Investment Scenarios: Ideal for those needing intricate strategies for cross-border investments and multiple tax jurisdictions.
- Sophisticated Financial Goals: Suitable for investors with specific, high-level objectives like philanthropic funding or establishing multi-generational wealth.
Key Takeaway
Discretionary fund management (DFM) offers personalised, expert-driven investment strategies for many investors, including high-net-worth individuals, retirees, and expats.
Whether managed or bespoke, DFM provides professional management, tailored asset allocation, and ongoing portfolio monitoring to meet your unique needs.
However, it’s essential that you carefully weigh the costs associated with DFM services, including management fees and additional expenses. While these fees represent the value of professional expertise and active management, they can also impact overall investment returns.
Book a complimentary call with Titan Wealth International to explore how our discretionary fund management services can help you achieve your financial goals.
