Let us start by looking at what a discretionary manager does, then the positives and negatives before finally, why you still need an Independent Financial Adviser!
What do they do?
An Independent Financial Adviser will recommend a discretionary fund manager to outsource the day-to-day running of a client's investment portfolio.
The independent financial adviser will question the client regarding preferences of investments, financial position, the investment objectives, and most importantly, setting the level of investment risk the client is prepared to accept. This will form the mandate that the independent financial adviser will order to the discretionary fund manager.
The discretionary manager will then use their significant expertise working within the mandate to seek opportunities and move away from risk. They will buy and sell investments at their discretion to seek a return from the portfolio.
The positives of using a discretionary fund manager
There are seven critical benefits to using a discretionary fund manager over standard model portfolios and multi-asset funds:
- Professionalism and track record. While just a human, if you choose wisely, the discretionary fund manager will be experienced, proven and most importantly, backed up by a great team of researchers. Having this structure and track record will provide confidence in future performance.
- Bespoke and tailored portfolio. The discretionary fund manager can take an entirely individual approach. The portfolio can exclude any dislikes a client may have. For example, if a client disagrees strongly with the way Facebook manages privacy, this stock can be excluded. Alternatively, the discretionary manager could lean more towards industries more familiar and comfortable to the client, including more of these sectors.
- Managing volatility. When the market hits volatility, providers are obliged to send notifications of losses. A good discretionary fund manager will add to these notifications some commentary to explain what happened and how they will manage your portfolio to mitigate. This coaching provides excellent reassurance in chaotic times and stops clients from making rash and costly decisions around their investments.
- Service. Discretionary fund managers often offer a Royals Royce service compared to model portfolio or multi-asset funds. Annual reviews often include a visit to the firm's offices, where you will be hosted as a VIP. You will get one-on-one time with the discretionary fund manager providing commentary on the year just gone and resetting the strategy for the year ahead.
- Scale. If you choose the right discretionary fund manager, they will save you investment costs by trading in house. With billions of clients funds under management, some clients will be selling as others buy. This internal trading means the costs are kept to a minimum. With these savings, this type of service may be more affordable than you think.
- Trustee responsibility. Suppose you are a trustee investing money on behalf of a trust. In that case, you have a legal duty under the trustee act 2000. The responsibility includes taking proper financial advice, making prudent investment decisions and documenting your progress. When bad choices are made, you could be held personally liable by the trust's beneficiaries. When using a discretionary fund manager service, you add a layer of protection against being accused of negligence by the beneficiaries. This is because you have outsourced the responsibility of investment decisions to the discretionary fund manager.
- Tax Management. This is the most significant benefit. If you hold investments outside of already tax-efficient investments such as pensions or ISA, a discretionary fund manager can actively manage your portfolio to reduce your tax. They can sell and buy assets to fully use all your tax allowances for the tax year. This active approach will reduce the tax drag on your investments and boost the portfolio.
The negatives of using a discretionary fund manager
There are only three potential downsides to discretionary services. These downsides could be underperformance, barriers to entry, and cost.
The discretionary fund manager is human, so will they consistently make decisions that produce gains over and above the market average? Performance needs to be monitored and checked to ensure value for money, and this is best done together with an independent financial adviser through annual reviews.
Discretionary fund managers all have minimum investment levels. As a result, not everyone can access this service.
A discretionary fund manager will charge for their service. These charges will be on top of the fees for the investment wrapper, i.e. a SIPP charge, investment costs for trading investments or fund charges. Remember, the savings mentioned earlier may make this service more affordable than you think.
If discretionary fund managers are so great, do you still need an Independent Financial Adviser?
Absolutely yes!
A discretionary fund manager may provide financial advice that they will charge for in addition or not offer advice and require an independent financial adviser to take responsibility for advice. A financial adviser is still necessary to coach the client and establish:
- The overall objectives of the investments;
- The correct amount of investment risk to be taken;
- Legacy planning;
- Advice on funding, withdrawals and drawing income.
Therefore this advice should come from an independent adviser to check that the discretionary fund manager is performing well compared to their peers. The independent financial adviser will be involved in the annual review and will question the discretionary fund manager around performance to ensure that you are getting value for money from the service.
Summary
There are many positives to using a discretionary fund manager service. However, specific clients will gain more from a discretionary investment service than others. Clients that will benefit most are:
- Clients who want an investment service with a higher level of customer service;
- Trustees who wish additional protection against negligence claims from beneficiaries;
- Finally, the biggest winners would be anyone holding an extensive portfolio invested outside of tax-efficient investments.
If you fall into one of the above three categories, contact us today for advice. We provide a free initial no-obligation first consultation. If you are not ready to talk just yet, download our free guide to working with trustees and high net worth investors. In this guide, you will learn:
- More about us, our business and the key advisers in our team who specialise in this area;
- The different styles of service offered by discretionary managers;
- The process we follow in helping you identify an exemplary discretionary service for you.
We look forward to assisting you further!
Our services relate to certain investments whose prices are dependent on fluctuations in the financial markets beyond our control. Investments and the income from them may go down as well as up, and you may get back less than the amount invested. Past performance is not a guide to future performance.
