An adviser’s guide to unitised DFM

Over the years, using a bespoke discretionary fund management service has been popular for high-net-worth-investors, but with the recent growth in unitised discretionary fund management, many advisers and clients are questioning whether it is necessary and/or cost-effective, to always use a bespoke discretionary fund management service.

David Macdonald, pictured, sales & marketing director, VAM Funds, explains…

What do we mean by a bespoke discretionary fund management service?

In the past, discretionary fund management was an option only available on a bespoke basis. This approach was offered to high net worth investors, with a higher minimum investment requirement of US$1m plus. The manager constructs an investment portfolio that is tailored to the client’s own specific requirements. For example, the investment manager can make a high degree of customisation and take into account any sectors or companies that you do not want to be invested in, such as tobacco.

What do we mean by unitised DFM?

Simply put, unitised discretionary fund management is an actively managed multi-asset investment product which combines the efficiencies and benefits of a fund structure, with the added value of a discretionary fund management service provided by a dedicated manger.

The unitised versions operate in the form of a collective investment scheme, allowing advisers to offer more of their clients the benefits of a DFM, such as regular, bespoke reporting services and the expertise of specialist portfolio managers that might otherwise only be available to institutional investors, all for a much lower minimum investment level.

A unitised approach effectively pools the portfolio, rather than a segregated approach, whilst offering specific levels of risk that reflect the DFM’s own investment philosophy and which can be applied to a client’s personal risk appetite.

What are the benefits?

As with multi-manager funds, unitised DFMs offer a range of benefits, most notably a higher level of active multi-asset diversification and access to a range of expert portfolio managers. Often the underlying investments of Unitised DFM include both active and passive investments.

There is no guarantee that a single manager can continually outperform the market all the time, but by accessing the expertise of multiple managers, advisers can benefit from each fund house using its own investment strategy, limiting the possibility of encountering a manager-specific risk. That can mean greater diversification than a standard multi-asset fund, which could be a more attractive option for investors who are looking for a lower-risk approach that seeks long-term gains and an improved chance of wealth preservation.

Perhaps the biggest benefit though, is that advisers can benefit from a DFM that has access to expert portfolio managers who have expertise within their chosen asset class or industry.

Having to keep up with market trends or specific industry news can take up a considerable amount of time for advisers, meaning less opportunity to focus on growing their business.

A multi-manager approach can take away this task, putting investment decisions in the hands of the experts, including some of the best managers and funds that might only be open to institutional investors.

However, by using a DFM, this is taken a step further. Advisers can hand over the overall management of their clients’ investments to a discretionary manager, who will pick and select funds and portfolio managers that fit within their investment philosophy. This means more time for advisers to focus on what really matters to them – addressing the needs of their clients and establishing new relationships.

And with a unitised approach, advisers will also be able to share the benefits of a discretionary manager with their clients. At VAM Funds, this includes online bespoke valuations that can be personalised to each client’s investment, offering an unparalleled level of transparency which stands over and above the standard factsheet.

What to look for when choosing a unitised DFM?

Once a unitised approach has been established as the approach an adviser wants to take, it’s important that he/she seeks out a manager which fits the needs of his/her clients and the investment outcomes they are seeking.

Firstly, it is vital that advisers find a manager who is in keeping with their own business’s investment philosophy and the investment objectives of their clients. By using a unitised DFM, advisers are outsourcing the management of their clients’ hard-earned capital, so it’s vital that they find a manager who invests in assets that have an appropriate level of risk for their clients, whilst also providing the returns they expect.

For example, a client who is looking to preserve his or her wealth without taking on a higher level of risk would be better suited to an investment strategy that prioritises prudence and consistency. This approach would offer strong risk-rated returns over the medium to long term, but also use multi-asset diversification to protect the adviser’s clients from any downside risk.

Secondly, it is important to select a Unitised DFM which provides a client with peace of mind and is domiciled in a highly regulated jurisdiction and operates under UCITS V regulations – for example Luxembourg.

Finally, and perhaps a central part of the reasoning behind choosing a Unitised DFM, they must have access to high quality portfolio managers that have a proven history of delivering alpha. To provide the added value that the DFM aims to bring clients, these need to be specialists within their chosen sector, who can use their core skills and knowledge of the industry to stand out from the crowd and generate above average performance.

Due diligence before committing to a relationship with a Unitised DFM remains essential, but once the relationship has been established, amid the plethora of other multi-asset options, advisers and their investment clients stand to benefit from a best of both worlds approach.

On the one hand, advisers can free their time to focus on their business. On the other, investment management is handed to experienced managers who can adhere to a strategy and who have access to highly-quality, specialist portfolio managers that are well positioned to deliver above average returns and protect clients from downside risks.

Gary Robinson
Head of Video and Ezines at Open Door Media Publishing. Deputy Editor, International Investment. An experienced journalist and filmmaker with more than 20 years' financial services experience, both as journalist and originally as a fully qualified IFA, Gary works across both International Investment and InvestmentEurope titles. Previous video production credits include projects on BBC, C4 and SKY.

Read more from Gary Robinson

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