Clients a DFM is suitable for

Mr Clapton says it was thought that a DFM was only suitable for these individuals as they could therefore benefit from the more efficient trading afforded by the discretionary mandate - and could generate sufficient value to justify the costs involved.

But in today’s market Mr Clapton says the use of investment models with a clear financial mandate and risk budget to maintain client suitability allows many more investors to benefit from discretionary fund management than ever before.

Essentially there is now tiered market offering ‘off-the-shelf’ managed portfolios which can be offered more cost effectively to more mainstream clients, with the more bespoke option remaining for the wealthier few.

Based on a comprehensive understanding of their client’s circumstances, Mark Stevens, head of intermediary services at Investec Wealth & Investment, says a financial adviser will determine what type of DFM is suitable for each client.

Mr Stevens explains DFM incorporates options ranging from model portfolio delivered via platforms, MPS (Master Portfolio Service) services through to individually managed ‘bespoke’ discretionary portfolios.

With the ‘bespoke’ discretionary portfolio option, Mr Stevens says this would typically concentrate on a broad range of asset classes including direct equities, fixed interest and alternative investments.

An advantage of such a service, according to Mr Stevens, is the ability to accommodate different client types - for example, individual, joint, trust, etc - and wrappers, but apply a consistent investment rationale for the client for all of their investments.

Mr Stevens says this can be particularly relevant when the adviser’s client has more complicated investment needs and/or existing portfolios where it would not be appropriate to move them into a model service proposition.

Emma Wall, director of UK intermediary sales at Morningstar, says today the array of DFMs out there means this approach to investment can be suitable for all types of investor irrespective of how much money they wish to invest.

She says: “When DFMs first launched, advisers tended to use them for their wealthiest clients who were looking for a bespoke investment service.

“Over time the DFM proposition has evolved – and the Retail Distribution Review has been introduced – which led to the adviser community recognising a need to provide this type of service to all clients no matter how much money they had.

“This led to the introduction of discretionary managed portfolio services aimed at advisers who were looking for their clients’ investments to be managed by experienced investment managers, with changes being made to the portfolios when the investment manager felt it necessary.

“These outsourced managed portfolios are not bespoke to each individual investor; instead all investors within a predetermined risk profile will have their investments managed the same way.

“This service is typically much cheaper than a bespoke portfolio and is more suitable to clients with less money to invest where the impact of charges can be greater.”

Gareth Johnson, head of managed investment services at Brewin Dolpin, says what is clear is that a range of options are required to ensure the adviser can work with the full range of clients they will deal with.

Mr Johnson says: “The key is the adviser deciding which is suitable for the client and then providing the mandate to the investment manager.”