Discretionary fund management has become one of the more popular offerings in this regard. David Gurr, founder of consultancy firm Diminimis, says it is important for advisers to begin with the basics: making sure the end-client understands the nature of the relationship they have with the DFM, and in particular that the latter has complete authority over how the money is managed, in a way that is not the case if the assets are run by an adviser.
But as the use of DFMs has increased, many advisers have themselves taken on discretionary permissions in recent years. Philip Milton, who runs PJ Milton and Co, an advice and discretionary investment management firm in Devon, says being a DFM allows him to “act now and advise the client afterwards.”
He says such an approach means clients' investments are made with a longer-term time horizon in mind.
He began as an independent financial adviser in 1985, before later adding the discretionary permissions.
Mr Milton says: “I knew that the only way I could look after those clients’ trust in me was to provide a discretionary service where I had the power to take action and advise the client afterwards.
"[I still get comments saying] ‘why don’t you sell this and buy that’.
"Is that a good idea or not? It is frequently confusing emotion and logic. A client may think: "I want to keep that as it is good and sell this instead as it has been bad’, for example."
David Scott, whose firm Andrews Gywnne provides both financial advice and discretionary investment management, says the main advantage to the end-client of using a DFM proposition is that such services often invest in a wider range of assets when compared to alternatives such as funds of funds.
Mr Scott claims that, in particular, traditional fund of fund and multi-asset strategies do not offer exposure to assets such as gold and silver, portfolio diversifiers which have performed strongly this year.
Mr Milton agrees that by being a discretionary investment manager he feels he can place clients in a more diverse range of assets than might otherwise be the case.
"If we are offered a discounted line of stock for example, we can do our utmost to arrange some shuffling to ensure clients benefit if we want it. That would be impossible on an ‘advised’ basis."
Francis Klonowski, an adviser at Klonowski and Co in Leeds, notes the main advantage of using a discretionary manager for clients is that such portfolios tend to be “more bespoke” than can be offered by the alternative options.
Yet the bespoke nature of the service offered by discretionary managers tends only to be available for clients with larger portfolios. For Mr Klonowski, £250,000 tends to be the level at which he looks to put clients with a DFM, though this is not a hard and fast limit.
Mr Gurr says technological advances mean minimum portfolio requirements imposed by DFMs are becoming rarer as it has become more cost effective for firms to manage smaller portfolios.
The ability to tailor portfolios remains a key selling point - and not just from an asset allocation perspective. Minesh Patel, an adviser at EA Financial Solutions in London, says he looks to DFMs in particular when there is a capital gains tax issue to manage, or when the client wishes to focus on environmental, sustainable and governance issues.
Service levels
Mr Klonowski’s perspective as an adviser is that DFM providers' level of service to IFAs is generally very strong, which is an added incentive to use them.
But service alone does not mean DFM services are relevant for all clients. Mr Gurr says a DFM solution is unlikely to be suitable for clients with a time horizon of less than five years. Those looking for a guaranteed, regular return may be better off in other products.
Jason Hollands is head of communications at Tilney, which provides both financial advice and discretionary management services.
He says the rise of outsourcing of different functions by financial advisers in recent years has led to “the bar being raised” in terms of quality of service.
Mr Hollands adds: “Where an investment portfolio is an outcome of the advice process - and it would be in many cases – then we can offer both investment advice (where a portfolio is constructed for the client but they retain the authority over whether or not to action transactions), centrally managed solutions (our multi-asset funds and MPS) or fully customised discretionary management.
"The decision really comes down to client preference, as well as size of the portfolio, with the centrally managed strategies being more economic for more modest sized accounts and fully bespoke for those client who typically have more complex affairs or very specific requirements.
"Some clients will want to hand over decision-making and be kept informed of how the portfolio is performing, others prefer to still be very involved and receive recommendations on proposed changes or ideas, and they enjoy a continuing dialogue with their investment adviser.”
