“I have just inherited some money and would like to invest this.  I have done lots of research online and some companies offer a discretionary fund management service.  What does this mean?”

Carl Lamb responds

Discretionary fund management is offered by a huge array of providers across the country. Despite this, it is not always easy to get a clear understanding of what it is and if it is the right choice for you. This can leave some feeling confused and therefore reluctant to invest in what we think is a great way to mitigate risk and grow your wealth.

Discretionary management allows the manager to buy or sell assets (stocks, bonds, cash etc) on your behalf within your portfolio without having to get your permission on each occasion.  The opposite management style is advisory, where a financial adviser must discuss any proposed changes with you and obtain your permission to make them.  Either style can work, and it may come down to a simple matter of your preference.

Discretionary investment portfolios are often arranged in a model portfolio format. These are essentially off the shelf portfolios that are risk graded, e.g. 1 to 10, and have a target return.  They allow the manager to use a standardised approach across all clients in a given model by investing in the same assets and at the same weightings (the proportions allocated to stocks, bonds, cash etc).  If managed properly, they also bring a consistent research process, are regularly reviewed, and are rebalanced back the target weightings periodically or as needed.

Whilst it is important to understand what discretionary management is, it is also important to understand what it is not. A common misconception is that the manager has total freedom to invest in whatever they choose, whereas in most cases each portfolio or model is constrained by the client’s attitude to risk or objectives.  These constraints help determine the asset mix to suit the client and maintain appropriateness.

At S&P, we offer both discretionary and advisory management.  However, we really believe in the benefits of discretionary management, primarily because:

  1. We can act quickly to take advantage of opportunities or mitigate risk. Advisory management has a natural time lag.
  2. The investments do not drift away from the agreed risk profile. This can be the case with advisory management if for example the client does not give permission to make a change to the portfolio.

We offer four ranges of models: S&P, Low Charge, Ethical, and Passive. The S&P range is the purest expression of our investment approach and has the fewest constraints. The Low Charge range aims to reduce costs by investing in a blend of active and passive funds. The Ethical range only invests in funds which meet our various ESG (environmental, social and governance) criteria. Finally, the Passive range only invests in funds that track global indices, which means they have the lowest fees in our ranges. All four ranges can be used for growth or income and include models which are suitable for our risk levels 1 to 10.

The investment decisions are made by our IOC (Investment Oversight Committee) which meets monthly to discuss every holding in every model of every range.  Meetings are also held as needed, such as when markets were suffering badly in the grip of the pandemic.  It also meets with fund managers, therefore can have frank discussions, and gain direct insight into how the funds are run, which informs decisions to buy, hold or sell.  The IOC is supported by various investment analysis tools which have been developed by our Investment Team.

Many advice firms do not have discretionary powers, meaning they are forced to outsource it.  This can result in higher overall charges because the client pays a fee to their adviser and a fee to the discretionary manager.  This is not the case with us – our discretionary management service is part of our overall financial planning service, meaning you can use it at no extra cost.  We believe this offers outstanding value.

We find that models give most of our clients a comprehensive choice.  However, we also offer bespoke portfolios, which are constructed to the client’s specific requirements and preferences.  Because bespoke portfolios are naturally more time-intensive to manage, we do charge a small additional fee.