Discretionary Management vs Multi-Manager
Why discretionary management?
Outsourcing investment, whether good for the adviser's business or not, must ultimately be for the benefit of the client. For many advisers, the decision to outsource will form a central part of their service proposition. If the interests of both client and adviser are aligned in this, the outcome is likely to be favourable for the client.
The RDR has meant that most, if not all, adviser businesses are reviewing their strategies in preparation for the new regime commencing on 1 January 2013. Many will conclude that delegating investment decisions to a full time investment specialist will be in the best interest of the client.
The adviser
After a series of market falls over the last few years, many advisers have concluded that they have neither the resource nor the skills to manage investment portfolios.
Some advisers may consider that they do have these skills, but either no longer want to shoulder the responsibility, or have decided that this is not going to form part of their service proposition going forward.
Sub-contracting their investment process to a third party means that the adviser can focus on financial advice and building a lasting relationship.
The client
For wealthier clients, a discretionary management service is perceived as a premium investment offering with a more personal service, regular contact and bespoke reporting.
The personal touch is probably what attracts most clients to discretionary management. The notion that each portfolio is constructed solely for their benefit, and any decisions are taken only with their circumstances in mind is a compelling story.
As we have shown, there are different levels of service available through discretionary management allowing clients with smaller portfolios to access some of these benefits.
Discretionary vs multi-manager
Once the decision has been made by the adviser to outsource the investment process, the main decision will then be whether to use multi-managers or discretionary managers.
The key differences between multi-manager and discretionary are outlined in the following table:
|
Feature/Benefit |
Multi-manager fund |
Discretionary |
|
Minimum investment
|
From £1,000 and monthly investment usually available
|
Generally £50,000 and above depending on level of service and assets employed.
|
|
Customisation opportunity
|
None
|
Yes, dependent on level of service.
|
|
Investment manager
|
Management team published and often held up as a selling point. Probably familiar to adviser
|
Ranges from individually appointed manager, with full discretion, through to a centrally managed operation. Portfolio manager likely to be unknown to adviser
|
|
Client influence
|
None
|
Client led
|
|
Personal service
|
None
|
Fundamental to most discretionary services. Level does vary though.
|
|
Taxation
|
CGT liable on exit from the fund
|
CGT liable after each sale
|
|
Asset types
|
Most used thanks to NURS and UCITS III regulation
|
Dependent on service but most can be employed
|
|
Existing assets
|
Not accommodated
|
Can often be accommodated within service
|
Table Discretionary vs multi-manager
There is a third option. Pre-constructed risk rated portfolios are available through many products and some platforms, although these would tend to be used as one-off solutions.
Discretionary service benefits
The benefits that a discretionary service can offer clients, although it does vary from manager to manager, include:
Investment portfolio tailored to the needs of the individual client;
Setting a benchmark agreed with the client;
Face to face meetings with the investment manager on a regular basis;
Opportunity to dictate preferences, such as ethical, exclude tobacco, not Japan etc;
Bespoke reporting including consolidated tax documents;
Where direct equities are held, the opportunity to participate in shareholder meetings and receive individual report and accounts is often offered;
Online access to portfolio and transaction history.
For more details on Discretionary Management Services for UK Intermediaries & Financial Planning services, view Defaqto's Official Research Report from Defaqto Adviser now