Insight
Managing an investment portfolio requires ongoing decisions about asset allocation, investment selection, risk, and rebalancing. For investors who prefer not to make these decisions themselves, a professional portfolio manager can take responsibility for the day-to-day management of their assets.
This arrangement is known as discretionary fund management (DFM). It allows an appropriately authorized investment manager to make investment decisions on the client’s behalf within an agreed mandate, taking into account the client’s financial objectives, risk tolerance, investment restrictions, and other agreed preferences, without requiring prior approval for every transaction. The approach can provide professional oversight and greater convenience while giving investors less direct control over individual trades.
The relationship begins with an assessment of the investor’s financial circumstances, objectives, risk tolerance, investment horizon, and preferences. These factors form the basis of an investment mandate that sets out how the portfolio should be managed.
Once the mandate is established, the investment manager can make decisions within those agreed parameters. This may involve:
The investor does not normally need to authorize each transaction. This gives the manager the flexibility to make changes when market conditions or the portfolio’s requirements shift, while remaining within the agreed investment mandate.
A discretionary fund manager is responsible for implementing and maintaining an investment strategy on behalf of the client.
The role can include researching securities and funds, assessing market conditions, monitoring risk, reviewing existing holdings, and making changes to maintain the agreed strategy. Managers may also diversify portfolios across asset classes, sectors, and geographic markets to help manage concentration risk.
The level of customization depends on the type of service selected. Some providers offer model portfolios based on predefined risk profiles, while others construct portfolios around an individual’s specific requirements.
Discretionary fund managers must follow the financial regulations of the countries in which they operate. These rules help ensure that investments are managed responsibly, clients’ interests are protected, and fees and investment decisions are clearly explained.
Before appointing a manager, investors should verify the firm’s regulatory authorisation, understand the protections applicable to their investments, and review the terms of the discretionary management agreement.
Delegating investment decisions can be useful for people who want professional oversight without managing their portfolio themselves.
A specialist manager can devote time to market research, portfolio construction, investment selection, and risk monitoring. This can be particularly useful for investors who lack the time or experience to manage a diversified portfolio independently.
Because individual transactions do not usually require prior approval, the manager can respond to changing market conditions without waiting for instructions. This can also make regular portfolio rebalancing more efficient.
The strategy can be aligned with factors such as risk tolerance, financial objectives, investment horizon, and certain ethical or investment preferences. The extent of customization depends on the provider, the investment strategy, portfolio size, and the terms of the management agreement.
Markets and portfolio allocations change over time. Regular monitoring allows the investment manager to identify when adjustments may be needed to keep the portfolio aligned with its original objectives.
Investors who do not want to spend time researching investments, monitoring markets, or deciding when to rebalance can delegate these responsibilities to a professional.
Professional management does not eliminate investment risk, and delegation comes with trade-offs.
The manager has authority to make decisions within the agreed mandate. Investors who want to approve every purchase or sale may prefer an advisory service instead.
A professional manager cannot guarantee positive returns. Although the manager is responsible for making investment decisions within the agreed mandate, investment performance remains subject to market conditions and the risks associated with the underlying assets. Past performance should not be regarded as a reliable indicator of future results.
Fees are generally charged for the service and may be calculated as a percentage of assets under management. Additional expenses can arise from underlying funds, transaction costs, foreign exchange conversion fees, custody and administration fees, applicable taxes and transaction duties, exit or withdrawal charges, and VAT or other indirect taxes. Some arrangements may also include performance-based charges.
Investors should therefore assess the total cost of ownership rather than considering only the DFM management fee.
Investment outcomes are influenced by the manager’s process, research, asset allocation decisions, and risk management. Reviewing the firm’s approach, experience, regulatory status, and reporting standards is important before choosing a provider.
The key distinction is who makes the final decision on individual investments.
| Discretionary Management | Advisory Management |
|---|---|
| Manager makes investment decisions within an agreed mandate | Manager recommends investments |
| Investor does not normally approve each transaction | Investor approves individual transactions |
| Provides greater delegation | Provides greater direct control |
| Suitable for investors who prefer professional day-to-day management | Suitable for investors who want to remain involved in decisions |
A discretionary portfolio manager may use a predefined model portfolio or construct a bespoke portfolio. Similarly, an advisory service can also provide recommendations based on model portfolios or individual circumstances.
Neither structure is inherently better. The appropriate option depends on how much control an investor wants and how involved they wish to be in managing their assets.
A model-based portfolio generally uses a predefined strategy designed around a particular risk level or investment objective. The manager makes decisions within that model, making this approach relatively structured.
A bespoke portfolio is built around the investor’s individual circumstances. It may consider existing investments, income requirements, risk preferences, ethical restrictions, geographic exposure, or other specific objectives.
For investors with straightforward requirements, a model-based solution may be sufficient. Those with more complex financial circumstances may benefit from a more tailored approach.
There is no single standard fee because pricing varies between providers and depends on factors such as portfolio size, investment strategy, customization, and the services included.
Potential charges may include:
Fees are often calculated based on assets under management, although the structure can vary.
Before entering an agreement, investors should ask for a clear breakdown of all costs and understand how they could affect net returns over time.
Delegated portfolio management may be suitable for investors who:
It can also be relevant to international investors whose portfolios span different countries, currencies, and financial markets. Managing these holdings independently can require significant time and knowledge.
On the other hand, investors who enjoy selecting their own securities, want maximum control, or prioritize a self-directed approach may not need this type of service.
Choosing a provider involves more than comparing historical returns. Investors should understand how the service operates and whether it fits their circumstances.
Key questions include:
A clear mandate and transparent fee structure can help ensure both sides understand their responsibilities from the outset.
For investors who want professional oversight without making every investment decision themselves, this approach can provide a practical way to delegate portfolio management. It combines an agreed investment strategy with ongoing decisions made by a professional manager.
However, delegation also means accepting less control over individual transactions and paying for the service. Returns are not guaranteed, and investment decisions can still result in losses.
The right choice depends on your objectives, risk tolerance, investment knowledge, portfolio complexity, and preferred level of involvement. Financial advisors and investment consultancies can help assess whether this type of arrangement may be appropriate, compare available solutions, and explain the associated risks and costs before you commit.
Yes. Your mandate can generally be reviewed and updated when your financial circumstances, objectives, or risk preferences change.
Withdrawals are generally possible, subject to the terms of your agreement and the liquidity of the underlying investments, applicable settlement periods, and any withdrawal restrictions or charges. Certain investments may take longer to liquidate than others.
Depending on the provider and agreed strategy, portfolios may include investments across different countries and markets, with currency and regulatory factors taken into account.
Reporting frequency varies by provider. Statements may cover holdings, transactions, performance, and applicable charges.
Depending on the mandate, you may be able to exclude specific sectors, securities, asset classes, or markets based on your preferences and requirements.
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