The latest craze in financial services is the proliferation of discretionary fund managers (DFM’s) otherwise known as discretionary investment managers (DIMS’s).  This follows closely on what transpired in the UK post their Retail Distribution Review (RDR), which was a harsh piece of legislation promulgated to curb bad advice and root out fly by night salesmen masquerading as advisers.

Our Financial Services Board is currently busy implementing our own RDR aimed at cleaning up the local industry, which if I may say is already well ahead of where the UK was pre-RDR.   Fortunately the local regulators have been able to learn from their UK counterpart’s mistakes, which led to a host of unintended prejudicial consequences for investors and the industry as a whole.

Regulation is often enforced by instilling fear in those they wish to regulate and this may explain the rush to outsource the responsibility for managing client portfolio’s to professional management companies i.e. the DFM’s.   The benefit for the adviser is twofold firstly they remove a large part of the legislation or advice risk and secondly by standardizing their advice process they are able to save time and grow their businesses.   But is this better for the client?

My instinctive feeling is the DFM solution is probably more advantageous to the adviser than the client, but of course this would depend on how the client’s money was invested before and the DFM manager selected after.  You get good DFM’s and you get lousy DFM’s.

My reservation pertains to the single manager risk inherent to DFM solutions.  It is well document that the most important decision when it comes to investing in a multi-asset class portfolio is the strategic and tactical asset allocation between the respective asset class of cash, bonds, property and shares.  Get the asset allocation wrong and it does not help that you may have picked the best shares or bonds you will under-perform.  Needless to say getting the tactical asset allocation calls right is the most difficult part of managing a multi-asset class portfolio.

The DFM manager decides on the strategic and tactical asset allocation and then outsources the management of the underlying assets classes to the specialist managers.    The problem being even if you have the very best underlying managers in the portfolio if the DFM gets the asset allocation wrong you are dead in the water.

For this reason I prefer a simple split fund strategy; by allocating to three or four independent fund managers each making their own asset allocation decisions investors get diversification of the most important driver of returns and that is, the strategic and tactical asset allocation.


Mark Williams
Mcomm, CFP®, HdipTax
T. 021-851 3746



Root out fly-by-night salesmen masquerading as financial advisers