1. Bigger is best! – Discretionary Fund Managers with larger Assets under management means greater protection for our clients.

Understandably a simple initial filter for selection of a Discretionary Fund Manager (DFM) might be AUM size but is this an effective criterion in selecting investment management solutions for a Centralised Investment Proposition (CIP)? Interestingly there is no direct correlation between size of assets under management and effectiveness in providing the relevant outcomes for underlying client needs.

True diversity of a CIP might better lend itself (for FCA criteria) to the selection of specific characteristics and approach that best meets the outcome that a client might require. Contrasting approaches will offer diversity to an adviser’s CIP proposition and add weight to determining a cohesive range of investment solutions and options so a boutique DFM offering may enhance diversity for an advice business.

  1. Greater investment resources are important for investment performance.

Oddly and in many cases the contrast seems to be the reality, many larger organisations struggle due to constraints. However, if we followed this line of reasoning the largest asset managers and DFMs would constantly be amongst the most effective in terms of performance and underlying costs, but simple wide-ranging contrasts indicate that this is not the case.

Invariably, focused boutique investment managers offer comparable and, in many cases, more effective outcomes.

  1. Using a DFM or outsourcing reduces my investment risks.

A DFM will be required to manage a mandate within the parameters agreed with client and their adviser which may reduce risk for an adviser in terms of the burdens of the day to day responsibilities of investment management. However, the underlying aspects of duty of care and initial and on-going suitability will need to be monitored on behalf of the client to ensure an alignment with required outcomes. The formation of a reliance-based relationship will be essential to connect on-going fees and management of the clients over all investment planning for an adviser (MiFID II).

  1. Client relationships are at risk if using a DFM.

Regrettably in the past some DFMs have been a little disingenuous in terms of adopting and control an adviser’s client relationship. Additionally, wealth management organisations have grown out of the traditional private client investment management environment combining investment management alongside financial planning.

It is therefore important to assess the nature of terms of business and engagement with a DFM in relation to determining the responsibilities and ownership of the tripartite investment arrangement. A clearly defined and documented understanding of the client relationships and each parties’ responsibilities, this should be in place before adopting a DFM partner. This will also provide for greater clarity and transparency for the client.

  1. DFMs don’t provide in-sourced solutions for my CIP.

A core strength for utilising a DFM is the operation and execution of an effective, repeatable and disciplined central investment process. Control of mandated investment risks are measured, and operational costs are mitigated. In many ways these are the “crown jewels” of a DFM business and not surprisingly they are reluctant to offer alternatives.

With the changes in 2018 through MIFIID 2 attaching value to the investment process from the adviser’s perspective in terms of contribution, it is potentially going to become a keener feature. It may therefore be important to consider DFMs that have the flexibility and the courage to offer the “crown jewels” without controlling ownership through white labelling and consultative investment collaborations and not just a vanilla DFM proposition for the adviser.

  1. True costs and real performance – platforms v direct.

Whilst much has been done in recent years to aid transparency in terms of illustrating total costs we still often find an element of confusion amongst advisers in determining true costs and how these impact on performance.

An example might be an external platform based managed portfolio service (MPS) where AMC and underlying third party costs are highlighted in the performance data. However the associated costs unique to each platform should also be considered as friction in terms of costs against total performance outcomes for an adviser’s client. Clearly the DFM cannot incorporate these as this is outside their influence but it should be a consideration when comparing a seemingly higher total cost MPS where the DFM provides the custody and execution in the same manner as a platform as a part of the overall service. Here the performance accounts for the additional costs where the platform alternative invariably does not. Or akin to an “apples and pears” comparative.

  1. The financial risk is too great in recommending a boutique DFM.

Arguably the reverse may be true, as with an advice business boutique DFMs have greater accountability and spend more time understanding the personal as well as business and reputational risks. Importantly we believe as with an advice business everything is interconnected and involves senior management and business ownership being involved with all decision making. With this comes a deeper level of understanding within the boutique investment business because it is personally linked to the ownership of the business. It also offers greater efficiencies and flexibility in developing an effective investment service for an adviser and their clients.

  1. Clients get a bespoke service with a DFM.

 The term bespoke is often bandied about within the investment industry and in many cases, it is interpreted as holding direct segregated holdings to accommodate an investment strategy.

Bespoke should be considered on two levels. The first is service however services offered to clients in bespoke portfolios are generally consistent throughout the DFM industry.

The second is tailoring towards a client’s very specific investment needs. However within the confines of effective and efficient frontier management there are a range of defined and optimal portfolio outcomes, truly bespoke is probably rare and limited in this respect, although tailoring is more of a feature. 

  1. Segregated portfolios are lower cost and more effective, that’s why I use a DFM.

It is true that segregated portfolios bear a lower embedded third-party cost, however turnover can be higher and structural costs of construction such as stamp duty, transaction costs, etc. can raise the total cost of a segregated portfolio.

Whilst seemingly more personalised, segregated multi-asset portfolios offer less diversification and asset management strength from across the full range of the investment universe. On a comparable basis outcome after costs can be broadly similar.


This article was created for the DISCUS website by Leigh Stephens of Tacit Investment Management. To find out more about Tacit please visit their dedicated page here.