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Point of View

What is Discretionary Fund Management?

Discretionary Fund Management is when an investment professional known as a Discretionary Fund Manager (DFM) builds and manages a portfolio of investments on your behalf. They take into account how much you have to invest, the level of risk you are prepared to take, your financial goals, and your tax position. Once the portfolio has been built, the Discretionary Fund Manager will make ongoing decisions about the portfolio using their own discretion – hence the name.

The Pros and Cons of using a Discretionary Fund Manager

A Discretionary Fund Manager can help you to:

  • Plan for the future, ensuring you set realistic investment goals.
  • Take a little more risk in order to make your money work harder for you.
  • Keep their investments on track. If their circumstances change, or a certain asset class performs badly or erratically, the DFM can help them change their approach.
  • Invest where there are opportunities, taking advantage of changing economic conditions rather than falling victim to them.
  • Protect your wealth through diversification. Too much exposure to one particular sector can have devastating consequences.
  • Consider your tax position when making investment decisions.

However, clients also need to be aware that:

  • A DFM will charge a fee.
  • Investment returns are not guaranteed, and you could lose money.

Why use a Discretionary Fund Manager?

The main reasons for using a Discretionary Fund Manager are:
 

Wealth management

Building an investment portfolio is a great way to grow and protect wealth over the longer term.
 

Experience and expertise

Not only are DFMs experienced in their own right, they often have teams of analysts and investment managers behind them, and have knowledge of tax and regulation.
 

It’s a full-time job

Managing an investment portfolio can be a full time job in itself.
 

They know the right questions

A DFM will ask the right questions, which is essential if

How does Discretionary Wealth Management work?

Here are the key steps involved in building a DFM portfolio:
 

STEP 1: Understanding your background

Before a Discretionary Fund Manager can begin building a portfolio, they have to ascertain your suitability for different investment approaches. They will start by carrying out an in-depth audit of t your financial wellbeing. This includes lifestyle, health, family circumstances, financial commitments, existing investments, savings, property and your tax position.

STEP 2: Understand your investment goals

They then ascertain what you are working towards, and ensure your goals are realistic and achievable. Do you need to generate income, capital growth or a combination of the two? If you’re looking for income, is a specific level of yield required? 

STEP 3: Understand your attitude to risk

It’s important to assess your psychological attitude to risk, as well as your understanding and experience of it. By carefully assessing your willingness to take risk, your capacity for loss and how much risk you will need to take to achieve your objectives, the Discretionary Fund Manager can determine your suitability for different investment approaches.

After carrying out the analysis, they will assign a risk profile, similar to the following categories:

  • Risk averse – unwilling or unable to take any risk.
  • Conservative – looking for returns in line with, or slightly ahead of, cash. Don’t want a significant reduction in capital, and understand that they may not be protected against inflation.
  • Defensive – want their savings to stay in line with inflation over the medium to long term so that the purchasing power is not eroded. Uncomfortable if their investments rose and fell in value very rapidly.
  • Moderate – looking for a return that beats inflation and cash deposits. Uncomfortable if their investments rose and fell in value very rapidly; however, they do accept the possibility of some capital loss.
  • Positive – searching for good returns ahead of inflation, and accept that this strategy carries a modest bias towards higher-risk assets. Comfortable with the value of their portfolio fluctuating, and can tolerate losses that may be prolonged in nature.
  • Adventurous – looking for the potential for a higher return in the longer term, and recognise that this may result in the value of the portfolio fluctuating, possibly significantly, especially in the short to medium term. The majority of their capital will be invested in higher-risk assets, which means a significant percentage of the capital sum could be lost.

STEP 4: Build a bespoke solution

Once they have a detailed understanding of your circumstances, appetite for risk and investment goals, the Discretionary Fund Manager can recommend a portfolio designed specifically to meet your needs. To do this, they must:

Agree the investment strategy

A typical portfolio is made up of a selection of different assets across different geographies. The DFM must consider asset mix, volatility, cost, market risks and the potential range of returns. All of these will be discussed with you detail.

Discuss tactical investing

Depending on how involved you want to be, the DFM will talk to you about individual holdings within each asset class. This can be particularly important to investors whose political or environmental views that would mean they want to avoid investment in certain companies and countries.

Work together

The process of building a portfolio is always one of collaboration between you and the DFM. You can choose to be more or less involved in the planning process, but you will be asked to approve the final portfolio before any investments are made.

STEP 5: Manage the solution

Once the portfolio becomes a reality, the DFM will regularly review it against its objectives, ensuring it stays on track. The extent to which you want to be involved in this process depends on you. Some people like to be called daily, while others are happy with an annual review.is essential if you want to find the right solution.

The benefits of Sanlam’s Discretionary Fund Management service

Our Discretionary Fund Management service offers clients:

  • Investment expertise, with a personalised approach
  • Ongoing Capital Gains Tax (CGT) management – we will take into account unrealised CGT positions when managing your portfolio
  • Access to a number of tax-efficient wrappers
  • Automatic use of ISA allowances
  • Ongoing access to an individual portfolio manager
  • ‘In specie’ transfers of your assets

We carry out full due diligence, applying rigorous analysis and control to all stock and fund selection decisions. Our expertise and performance is authenticated by ARC (Asset Risk Consultants), who are unbiased consultants that report on performance.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.