If your adviser uses a discretionary fund manager (DFM), or your adviser’s practice 
runs its own DFM business within its broader group, it will ask you to sign a discretionary investment mandate. This mandate must be one approved by the financial services regulator, the Financial Sector Conduct Authority (FSCA).
Without an authorised discretionary investment mandate, financial advisers must ask you to sign switch forms each time they recommend changes in the funds you hold in your investment portfolio.
If your adviser outsources investment decisions to a DFM, your adviser, possibly with the help of the DFM’s tools, will determine what you need from your investment to meet your goals – for example, for retirement or your children’s tertiary education.
The DFM will create what are known as model portfolios (or wrap funds) or unit trust funds (unitised DFM solutions) to suit the range of investment needs among the adviser’s clients and in line with the adviser’s chosen investment approach. Your adviser will identify the portfolio that is suitable for you.
The DFM may also create bespoke portfolios for wealthy individual clients, clients with unique needs or those who want to remain on a particular investment platform (linked investment services providers) that the adviser is not using.
Once the DFM has created model portfolios on the required investment platforms, it will manage them on all those platforms ensuring that bulk switches are done when changes are made to the portfolio so that all of the financial adviser’s clients in a particular strategy have the same investments at all times. This ensures that the adviser meets the Treating Customers Fairly principles and that the adviser has a repeatable and centralised investment proposition.
Some advisers who have what is known as a Category II Financial Service Provider licence and are able to manage investment portfolios without seeking your permission for each investment switch, implement the portfolios on investment platforms themselves using the advice of a DFM.
Your adviser will also recommend the appropriate product if you need one – for example, a retirement annuity fund, preservation fund, pension fund, provident fund, investment-linked living annuity, life annuity, discretionary or endowment product in which to house your portfolio. Investment platforms or linked investment service providers and life insurance companies usually offer a full set of such products.
For example, if you are young and need to invest for the long-term, your adviser may determine that you need an investment that delivers inflation plus six percent (a high-risk portfolio) and will recommend to you the DFM’s portfolio that is designed to meet this investment target and recommend you use a retirement annuity to achieve tax efficiency.
If you are older and drawing an income in retirement, the portfolio that meets your needs may be one that is designed to meet an inflation plus two percent target (a lower risk portfolio).
The FSCA issued a white paper on “Investment Related Matters” in June 2018, as part of its review of the way financial products are distributed (the Retail Distribution Review (RDR) initiative. The paper focussed on clarifying the roles of financial advisers and discretionary investment managers, addressing potential conflicts of interest and proposing regulatory measures to enhance transparency and consumer protection in the investment sector.
In the paper, the FSCA suggests that an advisor with a category I licence who also makes investment decisions using a category II licence, and charges for both activities, potentially has a conflict of interest. They earn a fee for recommending a portfolio and for managing that portfolio.
The FSCA has recommended that different people within an advisory business deal with advice and investment management.
If an adviser has a category II licence and makes investment decisions on your behalf, the portfolio may be referred to as the house view portfolio.
Many large financial institutions have also established separate DFM businesses within their groups to serve their tied agents and franchised advisers.
The FSCA’s final proposals on how to deal with conflicts of interest when it comes to DFMs are expected to be included in the Conduct of Financial Institutions Bill which is expected to be tabled in parliament soon.
If your adviser partners with a DFM, you are likely to pay the cost of this service – most commonly as a fee deducted directly from your investment or you could be invoiced separately for the service.
DFMs managing larger pools of assets may be able to offset their costs by reducing the other costs you pay because they can negotiate lower fees on the unit trust funds they include in your portfolio – particularly on selected investment platforms through which they can access wholesale fund fee classes that are not available to individual investors or smaller financial advisory practices.
In addition, DFMs managing unit trust funds can negotiate preferential fund or instrument fees, which can further reduce the overall fees you, as an investor, pay.
DFMs often include passively managed funds in their portfolios to help keep overall costs down. These lower-cost options can help balance out the higher fees of more expensive investments, such as hedge funds, included in the portfolio.
It is important to consider the total fee you are paying, weight it against the quality of the investment services you are receiving and to decide whether those services offer good value for your money.
When a DFM manages your discretionary investments in model portfolios, you may be liable for capital gains tax (CGT) when the DFM buys and sells unit trust funds and other collective investments schemes on your behalf. These transactions can trigger taxable events, which may reduce your net returns.
However, if you are investing through a retirement fund or a tax-free savings account, you will not incur this tax, making these products more tax-efficient for long-term investing.
DFMs can also help mitigate CGT exposure in discretionary portfolios by implementing strategies that allow investors to make use of their annual CGT exemption. This may include gradually migrating portfolios over time or timing disposals strategically, so that gains fall within the tax-free threshold. These processes not only enhance tax efficiency but also support smoother transitions when portfolios are restructured.
