Due Diligence When Choosing a Discretionary Fund Manager

Why Your Choice of DFM Matters More Than Ever

Outsourcing investment management to a discretionary fund manager is one of the most consequential decisions an advice practice makes. It shapes the client experience, influences outcomes, and directly affects your regulatory standing.

Under Consumer Duty ↗, advisers must demonstrate that the products and services they recommend deliver fair value and good outcomes. If your DFM underperforms, overcharges, or provides a poor service, that reflects on you, not just on them.

Yet many advisers choose a DFM based on a single meeting, a persuasive presentation, or a recommendation from a colleague. That is not due diligence. It is delegation without scrutiny.

This guide provides a structured framework for evaluating DFMs properly, so you can make a decision you can defend to your clients, your compliance team, and the FCA ↗.

Start With Your Client Proposition

Before evaluating any DFM, be clear about what you need from one. This depends entirely on what your clients expect and how your practice operates.

Ask yourself:

• What asset classes do your clients need? If you serve HNW clients with complex needs, a DFM offering only model portfolios of funds will not be sufficient. You may need one that can manage multi-asset class portfolios including direct equities, fixed income, alternatives, and real assets.
• What level of personalisation do clients expect? Some DFMs run centralised model portfolios with limited customisation. Others build genuinely bespoke portfolios for each client. Know which your clients need.
• What minimum investment size are you working with? DFMs have minimum thresholds. Some start at GBP 50,000 for model portfolios; bespoke mandates typically start much higher, often GBP 500,000 or more.
• Do you need a full turnkey solution? Some practices want the DFM to handle everything: portfolio construction, dealing, custody, reporting, and compliance support. Others want to retain more control. Turnkey MFO solutions are increasingly popular among firms serving HNW clients who want institutional-grade infrastructure without building it themselves.

The Due Diligence Framework

Structure your evaluation across six areas. Document everything; your compliance file should show the process, not just the outcome.

1. Regulatory standing and governance

This is non-negotiable. Before anything else, confirm the basics.

Check	How to Verify
FCA authorisation for managing investments	FCA Financial Services Register ↗
No outstanding enforcement actions	FCA Register and regulatory news
Adequate professional indemnity insurance	Request certificate
Clear ownership and governance structure	Ask for organisational chart and shareholder disclosure
Appointed compliance officer	Confirm name and reporting line
Business continuity plan	Request summary

Also check how long the firm has been authorised, whether there have been any changes in ownership or key personnel recently, and whether the firm has been subject to any FCA skilled persons reviews (Section 166).

2. Investment philosophy and process

A DFM should be able to articulate clearly what they believe, how they invest, and why their approach works. Vague answers here are a red flag.

Questions to ask:

• What is your investment philosophy? (Growth, value, income, multi-factor?)
• How do you construct portfolios? (Top-down, bottom-up, or blended?)
• What is your asset allocation process?
• How do you select individual holdings?
• What is your approach to risk management?
• How do you handle market downturns?
• Do you use derivatives, and if so, for what purpose?

Look for consistency between what they say and what they do. Ask for example portfolios across different risk profiles and compare them to what you would expect given their stated philosophy.

3. Performance track record

Performance matters, but it needs context. A DFM quoting impressive returns without disclosing the benchmark, time period, or risk taken is not being transparent.

What to request:

• Composite performance data across risk profiles (minimum 3 years, ideally 5+)
• Performance against stated benchmarks
• Risk-adjusted returns (Sharpe ratio, maximum drawdown)
• Dispersion of returns across client portfolios (how much variation is there between clients in the same risk profile?)

What to watch for:

• Cherry-picked time periods that flatter performance
• Benchmarks that are too easy to beat
• No mention of periods of underperformance
• Lack of independent verification

The Investment Association ↗ publishes sector performance data that can help you contextualise DFM returns against the broader market.

4. Custody and operational infrastructure

Where client money is held matters enormously. Institutional-grade custody provides an additional layer of protection that clients, particularly HNW clients, increasingly expect.

Factor	What to Check
Custodian identity	Who holds client assets? What is their scale and reputation?
Segregation of assets	Are client assets held separately from the DFM’s own assets?
Platform or direct custody	Does the DFM use a third-party platform, or do they have direct custody arrangements?
Reporting frequency	How often do clients receive valuations and transaction reports?
Online portal access	Can clients and advisers view portfolios in real time?
Dealing process	How are trades executed? Is there a best execution policy?

A DFM using a globally recognised custodian with trillions in administered assets provides a very different level of assurance from one holding assets on a small, lesser-known platform.

5. Service and communication

The day-to-day experience matters as much as the investment returns. A DFM that delivers strong performance but is impossible to reach or slow to respond will damage your client relationships.

Questions to ask:

• Who is my dedicated contact, and what is their experience?
• What is your response time for adviser queries?
• How do you communicate during periods of market volatility?
• Can you attend client review meetings (in person or virtually)?
• What reporting do you provide, and can it be customised?
• How do you handle ad hoc requests (withdrawals, additions, mandate changes)?

Test this during the evaluation process. If they are slow to respond when they are trying to win your business, it will not improve after you sign.

Think about how this fits into your client review meetings. A DFM that provides clear, digestible reporting and is willing to join review meetings adds genuine value to the client experience.

6. Fees and value

DFM fees typically fall into three layers:

Fee Layer	Typical Range	What It Covers
DFM management fee	0.15% to 0.75%	Portfolio management, research, dealing
Underlying fund charges (OCF)	0.10% to 0.80%	Fund management within the portfolio
Custody/platform fee	0.10% to 0.35%	Holding and safeguarding assets

The total cost to the client is the sum of all three. Some DFMs quote headline rates that exclude underlying fund charges or custody costs, so always ask for the total expense ratio.

Under Consumer Duty, you must be able to demonstrate that the overall cost delivers fair value. A DFM charging 0.50% but delivering bespoke multi-asset portfolios with institutional custody may represent better value than one charging 0.20% for a basic model portfolio of tracker funds, depending on the client’s needs.

Compare like with like. A boutique DFM offering genuinely personalised portfolios for HNW clients should not be compared on price alone with a mass-market model portfolio service.

Red Flags to Watch For

Through evaluating DFMs over the years, certain warning signs appear repeatedly:

• No clear investment philosophy. If they cannot explain what they believe and why, walk away.
• Performance data without context. Returns without benchmarks, time periods, and risk metrics are meaningless.
• Reluctance to share information. A reputable DFM will welcome due diligence. Evasiveness is a red flag.
• High staff turnover. If the team keeps changing, so does the investment approach.
• One-size-fits-all portfolios. If every client gets the same five portfolios regardless of their circumstances, the “discretionary” label is questionable.
• Pressure to commit quickly. Good DFMs are confident enough to let you take the time you need.

Building Your Shortlist

A practical approach:

1. Define your requirements based on your client proposition (asset classes, personalisation, minimums, service expectations).
2. Create a long list of 6 to 8 DFMs from industry directories, peer recommendations, and your own research.
3. Send a due diligence questionnaire covering all six areas above. Standardise it so you can compare responses.
4. Shortlist 3 to 4 based on written responses.
5. Meet face to face (or via video) with shortlisted firms. Meet the people who will actually manage your clients’ money, not just the business development team.
6. Take references from other adviser firms who use them. Ask about the experience during a difficult market period, not just the good times.
7. Document your decision with a clear rationale that links back to your client needs and due diligence findings.

Ongoing Oversight

Choosing a DFM is not a one-off exercise. You have an ongoing obligation to monitor the relationship and ensure it continues to deliver for your clients.

At minimum, conduct a formal annual review covering:

• Performance against benchmarks and peers
• Service quality and responsiveness
• Any changes to key personnel, ownership, or investment process
• Fee competitiveness relative to the market
• Regulatory standing (check the FCA register annually)

Keep a written record. If you ever need to justify your choice, or explain why you changed DFM, the documentation should tell the full story.

For practices looking to build long-term enterprise value, a well-documented DFM selection and oversight process is an asset. It demonstrates professional rigour to acquirers, compliance reviewers, and clients alike.

The Bottom Line

Choosing a DFM is a decision that deserves the same rigour you would apply to any significant business partnership. The right DFM enhances your client proposition, strengthens your compliance position, and frees you to focus on what you do best. The wrong one creates risk, frustration, and reputational damage.

Do the work upfront. Your clients are trusting you with this decision, and the quality of your due diligence is the foundation of that trust.