What is a discretionary fund manager (DFM)?

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Discretionary fund managers (DFMs) have become more popular in recent years so there’s a chance you may have heard about them from your financial adviser, or in the media where they’ve started to feature more prominently.

So, what is a DFM?

What makes them different from a financial adviser? And what are the benefits or otherwise of using one?

In simple terms, a DFM is a specialist investment manager. They design and manage investment portfolios to meet specific investor needs and to match particular appetites for risk.

As specialists, DFMs focus their time and resources on researching the investment market. They have access to research across all investment types and explore the market in depth. This means they can design portfolios suited to either an individual investor or a particular group of investors.

Most DFMs will charge a percentage of the value of the assets they manage on your behalf for their service. This charging structure aims to align their interests to yours because, if the value of your investment grows, so does the money they will earn.

What services does a DFM offer?

DFMs offer a number of different services, some very bespoke, working with a single client to design a portfolio specifically tailored to their needs. Others involve building managed portfolios to suit a group of investors.

On-platform managed portfolio services make up around a third of the market and 80%* of all of the on-platform managed portfolio services offered by DFMs have been launched since the start of 2010, demonstrating how quickly this option has evolved in recent years. We’ll focus on this model here.

What is the difference between a DFM and a financial adviser?

Where your adviser has recommended using a DFM on-platform, the difference between the services each offers is clear.

Financial advisers are experts in financial planning and they have a broad knowledge of all of the different financial products as well as the latest financial and tax regulation. In short, they have a toolkit that enables them to build a financial plan for you based on your needs and wants.

They will build a complete picture of your current financial needs and advise you on what you need to do to meet future goals and aspirations. To do this, they will look into your current finances, your income, your monthly commitments, your disposable income, and your spending habits.

They will also ask you what your immediate and long-term plans are, and what your present and future worries are, so they can advise on how to best achieve your financial goals, all in the most tax efficient way.

In contrast, DFMs specialise in investment management. Their job is to design and manage investment portfolios to meet the needs of savers.

If your adviser recommends using a DFM’s managed portfolio service on a platform, it’s you and the adviser’s responsibility to ensure the portfolio is suitable for you, even though it’s the DFM that manages it.

So, your adviser is a bit like the architect designing your house and the DFM is the carpenter building it. You work closely with the architect and trust him to understand what you want, and to have the expertise to choose the right carpenter to build your dream house. The theory is that by working together, a DFM and a financial adviser can deliver a better outcome because they’re both sticking to what they do best.   

Defaqto has found that 43% of UK financial advisers are currently outsourcing their investment proposition and of those, 72% are using DFMs**. It’s very possible, therefore, that your financial adviser will suggest this option to you.

Pros and cons of using a DFM

A growing number of financial advisers are recommending that clients use a DFM because they believe a DFM could deliver the investment performance clients are looking for, while freeing them up to concentrate on understanding your goals, needs, and attitude to investing.

DFMs have focused research capabilities and expertise that could help your investments grow. And because a DFM can make changes to the investments held, without having to seek your permission every time, they’re able to act quickly if they see an opportunity in the market.

However, the investment management expertise that a DFM brings to the table comes at a cost. A DFM is only value for money if they can generate an investment performance that puts you in a better position, after paying their fees, than you would have been without using them. There’s no guarantee they will do this and, as with all investment strategies, the returns they generate may go down as well as up and you may get back less than you originally invested. Your adviser will need to research the DFM to make sure they’re confident that they have the skills and processes required to add genuine value.

If you think using a DFM might be the right option for you speak to your financial adviser. They’ll be able to discuss the pros and cons relevant to your particular circumstances. They’ll also be able to advise you on the most suitable DFMs to consider given your specific needs and financial goals.


 

*DFM on a platform – A marriage of convenience, Financial Adviser, February 2016

**UK financial advisers increasingly use discretionary management services, Defaqto, April 2015