Understanding Discretionary Wealth Managers
In the ever-evolving landscape of the financial world, investors are seeking more efficient and effective ways to manage their wealth. Discretionary fund managers (DFMs) have emerged as a popular choice for those who prefer a hands-off approach to investment management. In this blog, we will explore the role of a discretionary fund manager, their growing popularity, the benefits they offer, and key considerations when choosing the right DFM to align with clients' financial goals and risk appetite.
The Rise of Competitive Discretionary Fund Managers
Over recent years, the market for discretionary fund managers has become increasingly competitive. This growth can be attributed to the success of the advice sector, as businesses reach a point where external expertise can enhance their investment propositions. As a result, advisers now have a wide range of options to choose from when recommending a DFM to their clients.
One of the primary reasons for this increasing demand for DFMs is the difficulty faced by businesses in managing centralized investment portfolios (CIP). As businesses expand and manage more clients, maintaining numerous portfolios can become operationally burdensome. The need to obtain individual client authorizations for each portfolio change, especially in the context of regulatory requirements like Mifid II, can lead to a proliferation of portfolio versions. This, in turn, adds to the challenges of reporting and monitoring these portfolios.
Discretionary Permissions: Worth the Extra Regulation?
While DFMs have gained popularity, some advice companies opt for discretionary permissions, allowing them to manage their clients' portfolios internally. Obtaining discretionary permissions can bring benefits, particularly in terms of speed and flexibility in making investment decisions.
Advisers who opt for the DIY approach with discretionary permissions can execute investment decisions swiftly, making timely adjustments to holdings based on market conditions or geopolitical events. This agility can be crucial for maintaining portfolio alignment with clients' goals and adapting to changing market dynamics.
However, obtaining discretionary permissions also comes with regulatory responsibilities, including compliance with reporting and disclosure requirements. Advisers must assess their client base and consider whether the benefits of in-house discretionary investment management (DIM) outweigh the additional regulatory burden.
Key Considerations When Choosing a DFM
Selecting the right DFM is a critical decision that can significantly impact the success of an investment strategy and the achievement of clients' financial goals. Here are four key factors to consider when outsourcing to a DFM:
a) Strategic Alignment :
- When choosing a DFM, it's essential to assess whether their investment approach aligns with your business strategy and clients' needs. This involves understanding the DFM's company values, culture, and investment management team. Additionally, determining whether the DFM offers investment propositions suitable for your client segments, such as active, passive, income, or ethical-focused portfolios, is crucial.
b) Client Relationship Enrichment :
- The level of support and service a DFM provides to your clients is a vital consideration. Look for a DFM that offers efficient client reporting, attends meetings when needed, and delivers timely market communications. With increased communication obligations under regulations like Mifid II, easy access to clear reports and a responsive investment team can enhance your client management process.
c) Investment Process :
- Understand the DFM's investment philosophy and how it aligns with your clients' financial goals. Scrutinize their investment processes to identify differences in approaches and potential impacts on returns and volatility. This analysis will enable you to match individual clients with the most suitable DFMs based on their preferences and risk tolerance.
d) Cost and Charges :
- Assess the fees and costs associated with outsourcing portfolio management to a DFM. With transparency requirements under MiFID II, comparing potential DFMs based on cost has become more straightforward. However, the focus should be on the value offered in return for the fees charged. While management fees are essential, additional services and the quality of service provided should also be considered to ensure the best value for clients.
Discretionary fund managers play a crucial role in providing investors with a hands-off approach to wealth management. As the market for DFMs becomes more competitive, it's essential for advisers to carefully assess their client base, business strategy, and regulatory considerations when selecting the right DFM. By strategically aligning with a DFM that meets clients' needs, provides excellent client service, has a sound investment process, and offers fair and transparent pricing, advisers can build successful, client-centric investment strategies that deliver long-term financial growth while managing risk effectively.
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