Has your financial adviser suggested using a discretionary fund manager? Five questions you should ask

7th July 2015

You’re in the process of seeking advice and just have been told by your adviser that you could benefit from the services of a discretionary fund manager –do you know the right questions you need to be asking? Financial information and performance provider FE Trustnet  discusses what to think and outlines the five key questions to ask below.

The market for discretionary fund managers has been growing over the last few years – fuelled largely by the need to mitigate risk and financial advisers’ increasing reliance on outsourcing as a cost/time-effective alternative.

A DFM is a professional third party investment manager who invests your money within the parameters of your risk-profile. In other words – you (or rather your adviser) hands over your money to the DFM, tells them how much risk you are willing to take (which will depend on your adviser asking about your investment goals, looking at your income, age, asset and other key variables) and the DFM will have full control over the investment decisions on your money.

These specialist managers do all the legwork for creating and maintaining a portfolio tailored for your risk-profile to help achieve your investment goal.

The DFM route will also appeal to those who don’t have the time or maybe the knowledge to run their own profile, while also  actively monitor the portfolio. Using a DFM also helps avoid the paperwork involved with and accounting needed to keep the taxman happy.

What’s the difference between having an advised portfolio and using a discretionary fund manager? An advised portfolio ultimately allows you to make your own investment decisions which your advisor executes on your behalf.

In fact, for many the DFM route may be preferable to an advised portfolio – although both have their merits. If you do choose to go down the DFM route there are a few key questions you need to ask your adviser to ensure your money is in good hands – as there is a growing concern that some advisers are not fully carrying out the due diligence needed when it comes to picking the right DFM.

–          Are you satisfied with the cost? Look carefully at the cost of the advice plus the annual management cost – is the total something you can afford over a long-term? But remember that the cheapest option in no way equals good value.

–          Check manager’s track record – ask your adviser how they have decided on that particular DFM. Did they go with the largest firm? It may be tempting for your adviser, especially if they are a small firm themselves – to go with the big, well-known names. But this does not mean your money will necessarily be better off. Instead get your adviser to also check for ratings and third-party endorsements.

–          Do you understand the portfolio? It is very important to understand your own risk-profile. Your adviser should find out important details about how the portfolios are constructed, what risk controls are in place and what fees and costs are associated with them; as this often varies from one DFM to another.

–          One size does not fit all – check that your adviser has some say in the way your money is being handled and gets enough face-to-face time with their chosen DFM.

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