Discretionary Fund Management

Discretionary and non-discretionary services: a big distinction

In the UK, wealth manager services divide neatly into discretionary and non-discretionary services. Which type a financial adviser uses makes a radical difference to their client offering and business model.

Discretionary Service

With a discretionary service, the manager can change a client’s portfolio without the client’s agreement.

Non-Discretionary Service

A non-discretionary manager can recommend changes, but the client must agree before they make them.

In both, the wealth manager must ensure the portfolio always stays suitable for the client’s risk tolerance and investment goals. Some advisers see delegating to a discretionary manager as pivotal to their model, as it frees them to focus on client work – the type that adds the most value to clients and their business.

Benefits of discretionary

A discretionary service can be faster and more efficient as advisers do not have to communicate with each client every time they want to make a change, nor obtain their agreement. Poor client responses to adviser queries can leave the adviser with an inconsistent collection of portfolios, rather than one uniform portfolio across all clients, which is much more efficient to manage.

Using a discretionary manager can also boost an adviser’s credibility and reassure clients that professionals are looking after their investments, as well as helping them compete for larger cases, including trusts and charities, where non-discretionary works less well administratively.

Many discretionary managers can also access a wider spread of assets, as some fund providers are more comfortable dealing with discretionary institutions, e.g. EBI’s preferential access to Vanguard’s Institutional Plus.

Benefits of non-discretionary

Non-discretionary services tend to be provided by advisers in-house, rather than third-party managers.

One reason advisers opt to act this way is that using an outsourced manager adds an additional layer of costs.

Discretionary permissions involve added regulatory obligations and managers must have good research facilities and well-qualified staff to run the investment process.

All these factors can lead to more costs. For some advisers, this is a disincentive, but others see it as well worth the benefits.

EBI’s Discretionary Portfolios

Discretionary services are often associated with managers who make active decisions to buy and sell stocks, funds and asset classes according to market conditions. Discretionary permissions allow these managers to react more swiftly to market changes.

Passively managed, evidence based services can also be discretionary, as EBI’s portfolios are. This simply means we can rebalance portfolios in line with investors’ risk tolerances quickly and efficiently, without needing their permission. EBI does not make active changes, but we still change funds occasionally if the evidence suggests it is appropriate (or if a cheaper replacement becomes available), and being discretionary means we can do this quickly and efficiently. This combination of evidence based investing and discretionary permissions saves advisers time and administration, liberating them to do the thing they love most – working with clients.