In an increasingly complex financial world, managing investments can be challenging for individuals and businesses. This is where Discretionary Fund Management (DFM) steps in as a valuable solution.
By giving control of investment decisions to experienced fund managers, investors can access professional expertise and strategic decision-making without being actively involved in day-to-day investment tasks.
But why does discretionary fund management matter, and how can it impact your financial future? For those looking to achieve long-term financial growth, understanding DFM is crucial.
In this blog, we’ll break down everything you need to know about discretionary fund management, its advantages, differences from other management methods, and how to choose the right provider.
What Is Discretionary Fund Management?
Discretionary Fund Management (DFM) is a type of investment management where a professional fund manager has full authority to make financial decisions on behalf of a client. This means that the manager can buy, sell, and rebalance investments in the client’s portfolio without requiring prior approval for each transaction.
The investment strategy is agreed upon at the start of the relationship, and the fund manager takes control of executing it. This allows for faster decision-making, as the manager can react quickly to market changes. The objective is to maximize returns while minimizing risk, all in line with the client’s financial goals and risk tolerance.
Key Features of Discretionary Fund Management
- Full Authority: The fund manager has discretion to act without client approval for each decision.
- Professional Expertise: The manager applies their market knowledge and analysis to grow the client’s wealth.
- Tailored Strategy: Each client’s portfolio is customized based on their goals, financial capacity, and risk tolerance.
- Time-Saving: Investors don’t have to manage daily financial decisions, allowing them to focus on other areas of life or business.
How Does Discretionary Fund Management Work?
Discretionary fund management follows a clear process that ensures the client’s financial goals are met. Here’s a detailed explanation of how it operates:
Initial Consultation
- The client meets with the fund manager to discuss financial goals, investment objectives, risk tolerance, and investment time horizons.
- The fund manager assesses the client’s preferences, including ethical considerations, preferred asset classes, and potential liquidity needs.
Strategy Development
- Based on the consultation, the fund manager builds a personalized investment strategy tailored to the client’s goals.
- Asset allocation is decided (e.g., the percentage of stocks, bonds, and other assets in the portfolio).
Portfolio Management
- The manager actively manages the portfolio, buying, selling, and rebalancing investments as needed.
- The goal is to maximize returns while protecting the client from excessive risk.
Performance Monitoring
- The manager tracks and reviews the portfolio’s performance, making adjustments as necessary.
- Clients receive periodic performance reports, often on a quarterly basis.
| Aspect | Discretionary Fund Management | Non-Discretionary Fund Management |
| Decision-Making | Manager makes all decisions | Client approves each decision |
| Speed of Action | Faster | Slower (requires client consent) |
| Level of Involvement | Low | High |
What Services Are Included in Discretionary Fund Management?
Discretionary Fund Management (DFM) is more than just buying and selling stocks. It offers a complete range of services aimed at growing and managing a client’s wealth. Here’s a breakdown of the key services included in DFM:
Portfolio Creation
- This is the foundation of DFM. The fund manager creates a personalized portfolio tailored to the client’s financial goals, risk tolerance, and investment preferences.
- The manager decides how much to invest in different asset classes like stocks, bonds, mutual funds, ETFs, and alternative investments.
Asset Allocation
- Asset allocation is the strategy of dividing investments among different asset categories to balance risk and reward.
- Fund managers analyze market trends, client objectives, and macroeconomic factors to diversify investments appropriately.
Investment Monitoring and Rebalancing
- Market conditions are constantly changing, which can shift the balance of a client’s portfolio.
- Fund managers track investment performance and rebalance the portfolio to maintain the agreed-upon allocation strategy.
Risk Management
- One of the biggest concerns for investors is risk. Fund managers assess and manage market risks, sector risks, and individual security risks.
- By diversifying investments, they aim to reduce the overall risk exposure.
Market Research and Analysis
- DFM providers have teams of analysts who research financial markets, study macroeconomic conditions, and predict potential changes.
- This information allows managers to make well-informed decisions.
Reporting and Transparency
- Clients receive periodic reports (monthly, quarterly, or annually) detailing investment performance, fees, and market conditions.
- This keeps clients informed and builds trust.
What Is the Difference Between Discretionary and Non-Discretionary Fund Management?
The primary difference between discretionary and non-discretionary fund management is who has control over investment decisions.
| Aspect | Discretionary Fund Management | Non-Discretionary Fund Management |
| Who Makes Decisions? | Fund manager makes all decisions | Client approves every decision |
| Speed of Execution | Fast (no approval required) | Slow (requires client approval) |
| Level of Involvement | Low (hands-off) | High (hands-on) |
| Flexibility | High (manager can act instantly) | Low (approval process causes delays) |
Which Should You Choose?
- If you want fast execution and minimal involvement, discretionary management is the better choice.
- If you want control over every decision and are comfortable making investment calls, non-discretionary management may suit you.
How Do You Choose Between Discretionary and Advisory Fund Management?
Choosing between discretionary and advisory fund management depends on how involved you want to be in investment decisions.
Discretionary Fund Management
- Control: Full control is given to the manager.
- Decision-Making: The manager can react quickly to market changes.
- Suitability: Best for investors who prefer a hands-off approach and want expert guidance.
Advisory Fund Management
- Control: The client retains control of all decisions.
- Decision-Making: The manager suggests options, but the client makes the final call.
- Suitability: Best for investors who want to be involved in decisions but still seek expert advice.
What Are the Fees Associated with Discretionary Fund Management?
Fees for discretionary fund management can have a significant impact on returns, so it’s essential to understand them.
Types of Fees in DFM
Management Fees
- What it is: A percentage fee based on the total assets under management (AUM), typically between 1-2% annually.
- How it works: If you have £100,000 in your portfolio and the management fee is 1.5%, you’ll pay £1,500 annually.
Performance Fees
- What it is: A fee charged if the portfolio achieves a certain level of profit.
- How it works: If your manager sets a 10% return goal, they might charge a fee for any returns beyond that.
Transaction Fees
- What it is: Fees incurred whenever the manager buys or sells securities on your behalf.
- How it works: If a fund manager makes 20 transactions per year, you might pay fees for each.
What Are the Advantages of Discretionary Fund Management?
Discretionary fund management offers several key advantages that make it appealing for busy investors and high-net-worth individuals.
Key Advantages
- Expert Decision-Making: Access to experienced fund managers who make informed decisions.
- Faster Reaction to Market Changes: The manager can respond immediately to shifts in the market.
- Personalized Investment Strategy: Each client receives a strategy based on their unique goals and risk tolerance.
- Hands-Off Approach: Clients don’t need to monitor investments daily.
- Diversification: Fund managers diversify portfolios to minimize risk.
Who Offers Discretionary Fund Management Services?
When it comes to managing wealth, many financial institutions and specialized firms offer Discretionary Fund Management (DFM) services.
These providers cater to a diverse range of investors, from high-net-worth individuals to small business owners. Choosing the right provider is critical because it impacts the quality of service, fee structure, and overall investment performance.
Here are the key types of institutions that offer DFM services:
Private Banks
Private banks are well-known for providing wealth management services to affluent clients. They offer exclusive access to discretionary fund management as part of their premium financial packages.
Why Choose Private Banks?
- Access to Premium Services: Private banks provide access to sophisticated investment opportunities that may not be available to the general public.
- Personalized Support: You receive one-on-one support from dedicated relationship managers.
- Comprehensive Wealth Services: They combine DFM with other wealth services like estate planning, tax advice, and inheritance planning.
Examples of Private Banks Offering DFM
- HSBC Private Banking: Offers fully personalized DFM services for high-net-worth clients.
- Barclays Wealth and Investment Management: Provides customized portfolios tailored to each client’s financial needs.
- UBS Wealth Management: Offers access to global investment opportunities managed by experienced fund managers.
Wealth Management Firms
Wealth management firms provide a more tailored approach than large banks. These firms are solely focused on growing and preserving client wealth, and DFM is one of their core services.
Why Choose Wealth Management Firms?
- Independent Advice: Unlike banks, many wealth management firms operate independently, offering impartial advice.
- Specialization: They often specialize in niche sectors, such as ethical or sustainable investing.
- Personalized Service: You can receive a more customized experience compared to larger financial institutions.
Examples of Wealth Management Firms Offering DFM
- Brewin Dolphin: Offers discretionary investment services tailored to private clients and small businesses.
- Rathbones: Specializes in discretionary investment services with a focus on ethical and sustainable investing.
- Tilney: Provides clients with DFM through a team of expert investment managers.
Specialist Investment Firms
Specialist investment firms focus solely on managing investment portfolios. Unlike wealth managers and banks, they do not offer estate planning, inheritance advice, or tax services. Their core focus is on generating superior investment returns.
Why Choose Specialist Investment Firms?
- Niche Expertise: These firms have deep expertise in specific asset classes, such as ETFs, bonds, or emerging market funds.
- Focus on Returns: Their primary goal is to achieve maximum portfolio performance.
- Lower Fees: Fees may be lower than wealth management firms or banks since the scope of services is narrower.
Examples of Specialist Investment Firms Offering DFM
- Hargreaves Lansdown: Offers online-based discretionary management with easy access to account dashboards.
- AJ Bell: Provides a lower-cost approach to DFM through its managed portfolio service.
- Charles Stanley: Offers a range of investment options, including ethical and impact-based portfolios.
Financial Advisors
Financial advisors often act as intermediaries, helping their clients access discretionary fund management through a third-party provider. They help clients identify their goals and recommend suitable DFM providers.
Why Choose Financial Advisors?
- Access to Multiple Providers: Instead of being limited to one DFM provider, advisors can offer access to several firms.
- Personalized Guidance: They provide advice on which DFM provider best suits the client’s risk tolerance and investment goals.
- Holistic Financial Planning: Advisors also offer estate planning, retirement planning, and tax strategies.
Examples of Financial Advisory Firms Providing DFM Access
- The Private Office: Offers advisory services while connecting clients with top-rated DFM providers.
- AES International: Provides investment advice and access to discretionary management through its partner network.
Online Investment Platforms (Robo-Advisors with DFM Options)
Some online platforms now offer access to discretionary fund management through automated tools and algorithms. While robo-advisors primarily offer advisory services, some platforms like Nutmeg offer discretionary-style managed portfolios.
Why Choose Online Platforms?
- Low Costs: Robo-advisors have significantly lower fees than private banks or wealth managers.
- Accessibility: Ideal for younger investors and those with smaller portfolios.
- User-Friendly Technology: Investors can view and track their portfolios through easy-to-use dashboards.
Examples of Online Platforms Offering DFM
- Nutmeg: Offers managed portfolios with options for discretionary control.
- Wealthify: Uses algorithms to automatically adjust portfolios according to market conditions.
How Do You Get Started with Discretionary Fund Management?
If you’re ready to take advantage of discretionary fund management, here’s a step-by-step guide to get started:
Step 1: Research and Choose a Provider
Not all providers are the same, so it’s important to choose a provider that aligns with your financial goals. You can select from private banks, wealth managers, investment firms, or robo-advisors.
Key Factors to Consider When Choosing a Provider
- Reputation and Reviews: Look at the firm’s history, client reviews, and awards.
- Service Offerings: Do they offer personalized, ethical, or sustainable portfolios?
- Fee Structure: Check if the fees are transparent and within your budget.
- Customer Support: Will you have access to a dedicated relationship manager?
Step 2: Book a Consultation
Once you’ve chosen a provider, schedule a consultation. This step is crucial because it allows you to discuss your financial goals, risk tolerance, and investment timeline with the provider.
What to Discuss During the Consultation
- Your investment goals (e.g., growth, income, or capital preservation)
- Risk tolerance (Are you comfortable with high-risk investments or prefer low-risk options?)
- Ethical and sustainable investment preferences (If applicable)
- Any specific preferences for asset allocation (e.g., focus on stocks, bonds, ETFs, etc.)
Step 3: Create a Custom Investment Strategy
The provider will design a customized investment strategy that suits your specific goals. The strategy outlines:
- Asset Allocation: The percentage split between asset classes (e.g., 60% equities, 30% bonds, 10% cash).
- Investment Objectives: Income generation, long-term growth, or capital preservation.
- Risk Management: Methods for managing risks, such as stop-loss orders, diversification, or hedging strategies.
Once you approve the strategy, you’ll sign a formal agreement.
Step 4: Sign a Discretionary Fund Management Agreement
The provider will send you a formal contract known as a discretionary management agreement (DMA). This legal document outlines:
- Scope of Authority: What decisions the fund manager is authorized to make on your behalf.
- Fee Structure: How much you’ll pay for management, performance, and transaction fees.
- Exit Terms: How you can exit the agreement if you change your mind.
Step 5: Fund Your Account
To activate your DFM service, you must fund your investment account. Depending on the provider, this can be done via:
- Bank Transfer
- Direct Debit
- Cash Deposit
Step 6: Portfolio Management and Ongoing Reviews
Once the account is funded, the fund manager begins managing your investments. You will receive:
- Quarterly Reports: Detailed performance updates, including returns, fees, and portfolio composition.
- Regular Reviews: Annual or semi-annual reviews where you can revise your goals, risk tolerance, and asset allocation.
Pro Tips for Getting Started with DFM
- Ask for a Fee Breakdown: Before signing, request a clear explanation of management fees, performance fees, and transaction costs.
- Stay Informed: Even though your manager makes decisions on your behalf, you should stay updated on market trends and portfolio changes.
- Consider a Trial Period: Some providers offer a trial period where you can exit the agreement without penalties.
Getting started with discretionary fund management is a seamless process if you follow these steps. With the right provider, you’ll enjoy the benefits of professional wealth management, faster decisions, and a hands-off approach.
Conclusion
Discretionary Fund Management (DFM) offers a convenient, hands-off approach for individuals and businesses looking to grow their wealth through expert investment management.
By handing over decision-making authority to professional fund managers, clients can benefit from faster execution, professional expertise, and tailored investment strategies.
This approach is ideal for investors who want to focus on their personal or business priorities while still maintaining control over their long-term financial goals. From personalized portfolio creation to ongoing rebalancing and risk management, DFM provides a comprehensive wealth management solution.
If you’re considering DFM, it’s essential to choose the right provider. Look for reputable private banks, wealth management firms, or specialist investment firms that offer transparent fees, dedicated support, and a proven track record of success.
By selecting the right firm, you’ll gain peace of mind, knowing your investments are being managed with care and expertise.
Whether you’re a high-net-worth individual, a small business owner, or a long-term investor, discretionary fund management can help you achieve financial growth with minimal involvement. Take the first step today by researching providers, consulting with experts, and setting your investment goals.
Frequently Asked Questions (FAQs)
What is the difference between discretionary and non-discretionary fund management?
In discretionary fund management, the fund manager makes all investment decisions without seeking client approval, while in non-discretionary fund management, the client must approve every decision before it is executed.
How do I choose between discretionary and advisory fund management?
If you prefer to delegate control to a fund manager, choose discretionary fund management. If you want to be involved in every investment decision, advisory fund management is a better fit.
What services are included in discretionary fund management?
Key services include portfolio creation, asset allocation, market research, risk management, rebalancing of investments, and ongoing performance reporting.
What are the fees associated with discretionary fund management?
Common fees include management fees (1-2% of AUM), performance fees (based on profits), and transaction fees (charges for each buy/sell trade).
Who offers discretionary fund management services?
DFM services are offered by private banks (e.g., Barclays, HSBC), wealth management firms (e.g., Rathbones, Brewin Dolphin), specialist investment firms (e.g., Hargreaves Lansdown), and online platforms (e.g., Nutmeg, Wealthify).
How do you get started with discretionary fund management?
To get started, research providers, schedule a consultation, sign an agreement, fund your account, and then let the fund manager take control of your investments.
What risks are involved in discretionary fund management?
Risks include market risk (due to market fluctuations), manager risk (if the manager underperforms), liquidity risk (difficulty selling certain investments), and fee risk (high fees reducing net returns).
What are the advantages of discretionary fund management?
Advantages include faster investment decisions, access to expert fund managers, personalized portfolio strategies, and a hands-off approach that requires minimal client involvement.
What should you look for in a discretionary fund management firm?
Look for firms with a strong reputation, experienced fund managers, transparent fee structures, and responsive customer support. Ensure their investment strategy aligns with your financial goals.
