This guide explains how discretionary fund management works, the investment approaches discretionary fund managers (DFMs) may use, and who this type of service may suit.
It also covers the potential benefits, risks and costs to help you decide whether discretionary fund management could be appropriate for your investment needs.
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 Portfolio Management/ 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 manager manages your portfolio within agreed parameters based on factors such as your financial goals, risk tolerance and investment horizon. Depending on the service, your portfolio may follow a predefined investment model or be tailored specifically to you. The manager monitors the portfolio and can make changes without seeking your approval for each transaction.
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 will receive information about how your portfolio is invested and how it is performing against its agreed objectives or benchmark.
Iain Ramsey
Chief Investment Officer
What Is a Discretionary Fund Manager?
A discretionary fund manager (DFM), also known as a discretionary investment manager, manages a client’s investment portfolio under authority given by the client. 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 discretionary fund manager’s responsibilities go beyond making investment decisions. They include keeping you informed about your portfolio, managing investments in line with the agreed mandate and meeting the regulatory requirements that apply to the service. 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
Considering Discretionary Fund Management?
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.
- Clients are matched to a predefined portfolio or investment strategy based on factors such as their objectives and risk profile.
- 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: 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.
Investment Management Services for Expats
Titan Wealth International offers tailored investment management for expats, aligning your portfolio with your goals and risk profile through disciplined, evidence-based strategies focused on sustainable growth.
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.
- Once the mandate is in place, the manager monitors the portfolio and can buy or sell investments within the agreed parameters. The portfolio is also reviewed against your objectives and relevant benchmarks.
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
In the UK, discretionary fund managers operate under the Financial Services and Markets Act (FSMA) and the rules of the Financial Conduct Authority (FCA), set out in the FCA Handbook. For UK retail clients within its scope, the FCA’s Consumer Duty requires firms to work towards good outcomes for customers, including in relation to products and services, fair value, customer understanding and customer support. Separate FCA rules also govern areas such as the suitability of discretionary portfolio management.
Many UK investment conduct rules have their origins in the MiFID II framework, although the UK regime has continued to develop since Brexit. Where investment services are provided across borders, additional rules may apply depending on the countries involved.
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. An important part of compliance is treating clients fairly and acting in their best interests where the relevant rules require it. This includes providing clear information about investments, risks and charges, and properly managing 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. For services within the relevant UK suitability rules, discretionary managers must make investment decisions that are suitable for the client and their portfolio.
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 | Because the manager does not need your approval for each transaction, they can respond to changing market conditions within the agreed mandate. | There’s a possibility that the manager’s investment choices may not always align perfectly with the client’s expectations or risk appetite. |
| Day-to-day portfolio management | The DFM handles day-to-day investment decisions within the agreed mandate. This can suit investors who do not want to make individual trading decisions themselves. | 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. | The portfolio may underperform its benchmark, and investment losses are possible. |
| 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. | |
| Managing risk and return | A DFM manages the portfolio with the aim of meeting its agreed investment objectives within the client’s risk profile. Returns are not guaranteed, and the portfolio can fall in value. | |
| Economies of scale | A DFM may be able to combine orders across client portfolios, which can make dealing more efficient. |
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 the way a portfolio is divided between different types of investment, such as equities, bonds, real estate and commodities. The mix will depend on factors including the client’s objectives, investment timeframe and attitude to risk. Discretionary fund managers may use asset allocation models to help determine and adjust the portfolio over time as the client’s circumstances or investment objectives change.
Risk Management Strategies
Discretionary fund managers implement a variety of techniques to mitigate risk while aiming to achieve desired investment outcomes. Risk management may include diversification across different asset classes and regions. Some managers may also use other techniques, such as hedging, where these are permitted by the investment mandate. 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
The investment approach will depend on the manager’s process and the client’s objectives, investment timeframe and risk profile. Their selection will be influenced by factors like market trends, economic forecasts, and the manager’s expertise.
Portfolio Monitoring and Rebalancing Practices
The manager reviews the portfolio to check that it remains consistent with the agreed investment strategy and risk profile. Where necessary, investments can be bought or sold to bring the portfolio back towards its intended asset allocation.
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 may also be able to use discretionary management through a managed or model portfolio service. Rather than building a separate portfolio for every client, the manager runs a range of portfolios with different investment objectives and risk profiles. A suitable portfolio can then be selected for the client. 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
If you are retired, a discretionary manager can manage your portfolio around objectives such as generating income, preserving capital or achieving longer-term growth. The approach will depend on factors including your income needs, investment timeframe and willingness to take investment risk.
Expatriates
As an expat, your investments may be affected by the tax and investment rules in more than one country. Your country of residence can also affect which investments and services are available to you. A DFM experienced in cross-border investing can take these factors into account when managing your portfolio.
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 1.5% 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. Where a performance fee applies, the amount charged will depend on the calculation set out in the service terms and the portfolio’s performance. 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.
Frequently Asked Questions
In discretionary portfolio management, the professional manager has the authority to buy, sell, and adjust your discretionary portfolio without seeking sign-off on each trade. In advisory management, on the other hand, the adviser provides an informed opinion, but every decision to buy or sell remains yours, and you stay in full control of the portfolio. While discretionary suits investors who want professional execution without day-to-day involvement, advisory is appropriate for those who prefer to stay in control of decisions.
For UK retail clients within its scope, the Consumer Duty requires firms to act in good faith, avoid foreseeable harm and support customers in pursuing their financial objectives. It also includes requirements around fair value and customer understanding. Separate FCA suitability rules apply to discretionary portfolio management.
The typical all-in annual cost of a Discretionary Fund Management (DFM) service can range from 1% to 3% of your total discretionary assets under management (AUM). What determines the exact figure is the size of your portfolio, the complexity of your investment strategy, and the level of service provided. Those with larger discretionary investments may be able to negotiate lower fees.
Not necessarily. Using a DFM does not by itself create additional tax reporting obligations. These generally depend on factors such as where you are tax resident, the investments you hold and the income or gains they produce. Expats may have reporting obligations in more than one country, so the position should be checked when moving between jurisdictions.
Minimum investment levels vary between services. Bespoke DFM is generally aimed at clients whose circumstances justify a more individually tailored portfolio, while managed portfolio services use predefined investment models and may be available at lower investment levels. Whether bespoke management is appropriate depends on more than portfolio size, including the client’s objectives and the complexity of their circumstances.
Using a discretionary fund manager does not automatically lock your money away. However, how quickly you can access it will depend on the investments held, the type of account or investment structure you use, and the terms of the service. Some investments may take longer to sell than others, so it is important to understand any withdrawal or liquidity restrictions before investing.
Moving to another country can affect how your investments are taxed, your reporting obligations, and which investments or services remain available to you. You should tell your discretionary fund manager or adviser about a change in residence so they can review whether your existing portfolio and service remain appropriate under the rules that apply in your new country.
Key Takeaway
Discretionary fund management (DFM) allows a professional investment manager to make investment decisions on your behalf within an agreed mandate. Depending on the service, your portfolio may follow a managed investment model or be tailored more closely to your individual circumstances.
DFM can suit investors who want professional oversight of their investments without making day-to-day investment decisions themselves. Before choosing a service, consider the investment approach, level of personalisation, risks and total costs, as fees and investment performance will affect your overall returns.
If you would like to find out whether discretionary fund management is appropriate for your circumstances, book a complimentary call with Titan Wealth International.
The information provided in this article is not a substitute for personalised financial, tax or legal advice. You should obtain financial advice and tax advice tailored to your particular circumstances and in respect of any jurisdictions where you may have tax or other liabilities. Titan Wealth International accepts no liability for any direct or indirect loss arising from the use of, or reliance on, this information, nor for any errors or omissions in the content.
