What is a discretionary fund manager?

Discretionary fund managers (DFMs) are investment managers chosen by a financial adviser and given a mandate to make investment decisions on behalf of the adviser’s clients. As a client of an adviser you will be asked to authorise this mandate.

Financial advisers outsource investment decisions on how to put portfolios together for their clients to DFMs because DFMs employ investment specialists who have a broader knowledge of the investment market and how to blend different asset classes, funds and managers to meet specified investment goals than the adviser.

DFMs are licenced as financial services providers under the Financial Advisory and Intermediary Services (FAIS) Act with what is known as a Category II licence. This licence enables them to make investment decisions on your behalf without obtaining your consent for each individual transaction.

DFMs are also commonly known as discretionary investment managers (DIMs). In the UK and some other jurisdictions, DFMS are referred to as model portfolio providers (MPPs). Additionally, many DFMs operate like retail multi-managers and may be referred to by this label.

Increasingly popular among advisers

Good financial advisers will recommend you diversify your investments across different asset managers to reduce the risk of your investments being too concentrated and dependent on the decisions of a single manager.

To put a well-diversified portfolio together, your investment adviser needs to know not only which managers to select, but which managers’ investment styles complement each other to ensure you are getting good diversification. Choosing managers with similar investment approaches will not give you effective diversification or reduce your risk.

Advisers can either take on the role of choosing and blending managers themselves or they can use a multimanager or DFM.  But while multi-managers create funds or portfolios that advisers can select, DFMs provide a more personalised investment service to ensure that the investment portfolios they create suit the adviser’s chosen investment philosophy and their clients’ needs.

DFMs have also become increasingly popular as a result of:

• The large universe of local unit trusts, global mutual funds, exchange traded funds, hedge funds, private equity funds and other investments from which to choose. Many advisers admit they do not have the capacity to do as deep and as an broad analysis of these investment options as a DFM typically can.
  
  
• Increased regulation of financial advice and obligations on advisers to conduct due diligences and check the suitability of the products and services they recommend to you. DFMs do the compliance for advisers and maintain the required investment management governance.
  
  
• The increasing complexity of, and volatility in, investment markets.
  
  
• The rising level of skills required to construct a portfolio using complementary investment styles, managers and markets.
  
  
• The assistance DFMs provide to advisers to determine investors’ risk profiles and match them to suitable portfolios.
  
  
• The ability of DFMs to ensure portfolios for investors with similar needs and risk profiles are managed consistently and when changes are made, they are made for all investors at the same time, thereby ensuring the adviser meets the necessary principles of treating customers fairly.
  
  
• The support DFMs provide in ensuring advisers can inform their clients about their portfolios and what to expect given what is happening in the markets.

What do DFMs do?

DFMs essentially perform the role of a multi-manager but instead of offering ready-made funds or off-the-shelf portfolios, they customise the investment portfolios they create to serve the adviser’s chosen investment philosophy and to best serve the adviser’s book of clients.

The services DFMs offer differ from one DFM to another, but the range of services they may offer includes:

• Determining the appropriate strategic asset allocation to meet the investment targets for a set of appropriate strategies;
  
  
• Stress testing the asset allocation based on expected returns and potential risks across the different asset classes and regions, and making tactical adjustments to the asset allocation where necessary; 
  
  
• Researching and selecting the managers to manage the different asset classes;
  
  
• Blending the managers to enhance diversification and balance investment risks;
  
  
• Evaluating and managing the investment risks often with the help of sophisticated technology;
  
  
• Managing the portfolio to ensure the allocations remain in line with chosen asset allocation strategy;
  
  
• Setting up the portfolios on different investment platforms and managing changes the portfolios when these are required;
  
  
• Preparing model portfolio fact sheets for each strategy which may be branded for the adviser;
  
  
• Ensuring advisers understand the portfolio choices and any changes to them so advisers can coach and have meaningful conversations with you, their client;
  
  
• Reporting the performance of the portfolio to the investor; and
  
  
• Answering questions and addressing challenges to investment selections.

How does outsourcing benefit me?

Financial advisers who outsource portfolio construction decisions to a DFM are not only able to offer their clients well-researched and professionally managed portfolios, but outsourcing this role also frees them up to focus on their relationship with you and providing better advice on all aspects of financial planning.

In the same way that a general practitioner is well-informed about your health but will recognise that there are times you need to see a specialist, advisers should remain well-informed about investing and the markets but can often serve you better by recognising that specialists who focus exclusively on structuring portfolios, can add value.

Advisers who outsource decisions about investments to a DFM are able to focus more holistically on your overall financial well-being. This includes helping you define your financial goals, ensuring you are saving enough to achieve them – especially for retirement, minimising your tax, securing appropriate risk cover for events such as disability or premature death and ensuring you have a valid will and estate plan