Working With a Discretionary Fund Manager: What You Need to Know

The decision to hand over investment management to a professional — rather than managing a portfolio yourself or receiving advisory recommendations — is one of the most significant choices an investor makes. A Discretionary Fund Manager (DFM) takes on that responsibility, making day-to-day investment decisions within parameters agreed with you, without needing to seek approval for each transaction.

For HNW individuals who are time-poor, who prefer to focus on their business or professional career, or who simply recognise that active portfolio management requires specialised expertise, a DFM can be a sound choice. But the market for discretionary investment management is varied, and understanding what you are buying — and what you are paying for — matters considerably.

What Does a Discretionary Fund Manager Do?

Under a discretionary mandate, you authorise the DFM to manage your investments within agreed investment objectives and constraints. Typical parameters include:

• Investment objective: capital growth, balanced growth and income, or income generation
• Risk profile: agreed through a suitability assessment — cautious, balanced, moderate, adventurous
• Asset classes: which asset classes are permitted (equities, bonds, property, alternatives, private assets), which are excluded, and within what ranges
• Benchmarks: the performance target (often a blend of indices or an absolute return target)
• Restrictions: assets or sectors you wish to exclude (ESG screens, concentration limits on individual holdings)

Within these parameters, the DFM decides what to buy, sell, and hold — and when. You receive regular reporting (typically quarterly) showing holdings, transactions, performance, and charges.

Bespoke Mandate vs Model Portfolio Service

There is a meaningful distinction between a genuinely bespoke DFM mandate and a Model Portfolio Service (MPS).

Bespoke mandate: the portfolio is constructed specifically for you. Holdings, weights, and decisions reflect your personal investment policy statement. Direct holdings in individual equities, bonds, or funds are common. Reporting is fully tailored. This is the traditional private bank or wealth manager offering. It is typically available to investors with a minimum portfolio of £500,000 to £1 million, and more commonly starts at £2 million or above.

Model Portfolio Service (MPS): you are allocated to one of a range of model portfolios based on your risk profile. Broadly similar portfolios are operated for all clients in the same risk category. Underlying holdings are typically funds and ETFs rather than direct securities. MPS is often delivered through a platform (Transact, Nucleus, Quilter, etc.) and is accessible from as little as £50,000. Most of what is sold as "discretionary management" by financial adviser firms using third-party DFMs is actually an MPS.

The distinction matters because an MPS is a standardised product — your portfolio is not fundamentally different from thousands of other clients in the same model. A bespoke mandate should be genuinely tailored to your circumstances, tax position, existing holdings, and restrictions.

Fee Structures

DFM fees are typically expressed as a percentage of assets under management (AUM), charged annually and usually deducted monthly. Common structures:

Ad valorem (percentage of AUM): the most common model. A typical all-in DFM management fee ranges from 0.5 to 1.0 per cent per year for a bespoke mandate, with lower fees at higher AUM levels. Model portfolio services often charge 0.25 to 0.5 per cent for the DFM component, with a platform fee and underlying fund costs on top.

Flat fee: some DFMs, particularly for very large mandates, charge a flat annual fee. This is proportionally cheaper for large portfolios.

Performance fee: some DFMs charge a performance fee (a percentage of gains above a benchmark or hurdle rate) in addition to a base management fee. These require scrutiny — are they calculated correctly, is the benchmark appropriate, is there a high-water mark?

Total cost of ownership: the DFM management fee is not the only cost. Add:

• Platform or custody fees (if the portfolio is held on a third-party platform)
• Underlying fund costs (if the DFM uses funds/ETFs, there is an ongoing charge on the underlying funds)
• Transaction costs (stockbroker commissions, stamp duty, foreign exchange spreads)

The total cost for a model portfolio service can easily reach 1.5 to 2.0 per cent per year when all components are included. For a £500,000 portfolio, that is £7,500 to £10,000 per year. This cost must be justified by the investment performance and service quality received.

Performance Reporting and Attribution

Understanding whether your DFM is adding value requires more than looking at total return. Key questions:

Against what benchmark? Performance should be compared against an appropriate benchmark — typically a blended index reflecting the target asset allocation, or a peer group composite. A DFM that outperforms a 60/40 equity/bond benchmark in a year when equities rose 20 per cent has not necessarily demonstrated skill if their portfolio had 80 per cent in equities.

Risk-adjusted returns: what level of volatility was required to generate those returns? A DFM generating 8 per cent with 20 per cent volatility has done worse than one generating 7 per cent with 10 per cent volatility, on a risk-adjusted basis.

Attribution: where did the return come from? Asset allocation decisions (which asset classes to over/underweight) versus security selection (which specific stocks or funds within each class)? Attribution analysis answers this.

Time horizon: DFM performance should be assessed over a full market cycle (five to seven years minimum), not over short periods where luck and market conditions dominate.

Most DFMs provide performance reporting — but the detail and transparency of that reporting varies considerably. Ask for detailed attribution before appointing a DFM and review it regularly.

Switching DFMs

Switching from one DFM to another involves practical and tax considerations:

Tax events: if the existing DFM holds direct securities, transferring to a new DFM may require liquidating those holdings, triggering CGT. Where the portfolio can be transferred in-specie (assets transferred without realisation), this is preferable but depends on whether the new DFM accepts the same assets.

Transfer in-specie: most DFM platforms support in-specie transfers between platforms, avoiding forced sales. The process takes several weeks and requires coordination between outgoing and incoming custodians.

Notification: you are entitled to notice of your DFM's fees, performance, and the reasons for significant portfolio changes. The DFM's investment management agreement will specify notice periods and exit terms.

Due diligence on the new DFM: before switching, conduct proper due diligence on the incoming DFM — track record, regulatory status (check the FCA register), fee transparency, and the depth of their investment team.

Questions to Ask Before Appointing a DFM

1. What is the total cost of ownership, expressed as an annual percentage of AUM and a pound amount at my portfolio value?
2. What is the benchmark against which performance is measured, and why is it appropriate?
3. How many investment professionals manage or oversee this portfolio, and what is the investment process?
4. What is the minimum portfolio size, and what level of bespoke tailoring will I actually receive?
5. How is my suitability reassessed as my circumstances change?
6. What is your FCA regulatory status and has your firm faced any regulatory action in the past three years?
7. How do you manage ESG or ethical restrictions, if I request them?

Investments can fall as well as rise in value. Past performance is not a reliable indicator of future results. DFM fees and structures change. The FCA register is the authoritative source of information on DFM regulatory status. Professional advice on the selection of a DFM is advisable.

How Global Investments Can Help

Global Investments provides discretionary investment management for internationally mobile HNW clients alongside broader financial planning. Our investment management integrates with tax planning, estate planning, and currency management — providing a holistic service that a standalone DFM cannot. Our regulated investment-advice services are provided through Financial Services Network Ltd, regulated by the Mauritius Financial Services Commission (Licence C116016070).

For internationally mobile clients, we take account of your specific jurisdictional circumstances, residency position, and multi-currency requirements — factors that many UK-focused DFMs are not equipped to address.

Contact us to discuss your investment management requirements and arrange a review of your current portfolio.