A Discretionary Fund Manager or ‘DFM’ exercises their professional discretion to buy and sell investments on your behalf.
A discretionary management service can deliver highly tailored investment portfolios based upon your individual circumstances and objectives.
This is in contrast, to an advisory mandate in which you, as the client, are asked to approve recommendations in advance.
Discretionary Fund Managers argue that their autonomy enables them to:
✔ Rapidly react to market conditions
✔ Outperform benchmarks
✔ Provide highly bespoke solution
✔ Demonstrate individual expertise in stock picking
✔ Re-balance whenever required
Discretionary Fund Management is viewed as a traditional way of managing investments, generally with an individual investment manager or committee responsible for investment decisions. A Discretionary Fund Manager often holds individual securities likes stocks and bonds but also funds and derivatives.
A Discretionary Fund Manager normally offers greater visibility of what the underlying investments are. For example, there might be 30 different stocks, and 10 different bonds in the portfolio, and any report produced will tell you about the performance of all of them. With a fund or ETF portfolio, you will get less information about the underlying investments instruments.
Over recent years, the use of an international Discretionary Fund Manager by traditional offshore IFAs has become popular for several reasons: -
Often not. AES do not usually advocate the use of a DFM because there is a substantial amount of scientific evidence which suggests their active approach to investment simply does not work.
Cost is accentuated in the international marketplace where financial salespeople often resist direct custody by a DFM so they can hold the assets on a platform (such as an offshore bond) from which they can extract extra hidden establishment and management commission.
This is signposted by the fact that clients are advised on separate pension products or insurance bonds from a range of offshore life insurance companies.
When coupled with additional fees, such as platform or product charges, the benefits of a more sophisticated portfolio might be lost.
When judged on performance, DFMs fall into the same category as any other active investment managers, that is, they fail to consistently outperform the market and thus struggle to justify the expense incurred.
In most cases, a well-constructed passive investment portfolio will produce better results and give you the benefit of financial planning advice alongside the investment management services for a total expense ratio below that of an international Discretionary Fund Manager service.
We would only recommend considering a DFM where a client has highly complex requirements.
If you have been ‘orphaned’ and left holding legacy products with no active financial adviser.
Only consider if low cost passive solutions are part of the Discretionary Fund Management service.
Our verdict is that while a direct DFM is far better than a financial salesperson alone (if they are well run), on the whole they are too expensive and simply don’t work.
We suspect that many traditional DFMs maintain the traditional status quo of the financial services industry.
This means they pay huge salaries to private client investment managers and investment ‘gurus’ to promise results which it has been scientifically proven simply don’t come.
This money comes from your returns and we suspect that technological change (given computer beat man as far back as 1997) and the increasing mountain of evidence against active performance, will soon re-shape this marketplace.