Discretionary Fund Managers must take a modern approach to their fiduciary duty

28 Aug 2025

First seen in Professional Adviser

IFAs are highly skilled at helping clients understand their financial needs and priorities and developing and finally implementing strategies to best meet them. When I first started out in pensions a key part of this process that an IFA delivered was advice about which funds the client should invest their savings in.

I worked for a pension platform, and we would arrange roadshows and other events at which a range of fund managers could present to IFAs about their investment philosophy and approach to the markets. The best IFAs became quite adept at asking penetrating questions of fund managers, that cut through the sales pitch, and enabled the IFA to put together well thought through investment recommendations to their clients.

Choosing a discretionary fund manager

Today many IFAs prefer to focus on a higher strategic plain. They have become super-skilled at creating financial plans that will optimally deliver solutions to client’s financial needs. This could involve how much to save in a SIPP and when to save it, but probably not advice on which funds to invest the contributions in.

Asset selection is a critical part of the whole financial chain and often IFAs prefer to sub-contract this to a Discretionary Fund Manager (DFM). There are some obvious advantages in doing so, such as the in-depth investment experience and knowledge of a DFM as well as the ability of a DFM to react at speed.

If President Trump is making another landmark speech in the White House Rose Garden, a DFM can have adjusted portfolios before Trump has even finished. Meanwhile an IFA might be tied up in a whole day of financial planning meetings with other clients.

Having a really good DFM is now an important part of the total client solution. The care with which IFAs used to put forward fund manager recommendations to clients has switched across to a need to recommend the right DFM for the client’s portfolio.

The DFM's mandate helps to define their fiduciary duty

The DFM has a duty to do the best they can for their client. “Nobody can do better than their best” was one of my great-uncle’s stock answers when berated by a client wanting greater assurance of the outcome they might expect. But making the best investments for a client is a decision with several factors to consider.

Higher investment returns are better than lower ones. But the drive for higher returns must be tempered by an appreciation of the risks involved and matching those potential downsides against the client’s risk tolerance. Costs come into play as well – investment research is not free and the DFM must balance the amount spent on seeking out investment opportunities against the potential benefits of finding a new asset to add to the portfolio.

In some cases the DFM will be clearly girdled by specific client instructions. “No tobacco” as an instruction means the DFM will not be buying shares in Philip Morris, the world’s largest quoted tobacco company by market capitalisation. Genuinely clear instructions are helpful and mostly welcomed by DFM’s, yet limitations can be deeply frustrating if they introduce grey areas. Should supermarket shares also be avoided because they sell tobacco? Or should supermarkets be preferred over a chain of convenience stores because it’s known that convenience stores derive a higher share of their overall revenues from tobacco than supermarkets do?

Discretionary fund managers need to take a modern approach to their fiduciary duty

When selecting a DFM, nothing shows more clearly that a DFM has the client’s best interests at their heart than having a dynamic approach to how society sees that fiduciary duty today. The concept of fiduciary duty may be biblical, but its interpretation has been rapidly evolving in recent years.

In the Kay Review of UK Equity Markets and Long-Term Decision Making, Professor Kay noted that fiduciary duties are a legal concept created by case law. This means that each time the Courts decide on arguments put before them, fiduciary duty is further defined. And each time that a King’s Counsel or leading law firm produce an opinion, our understanding of fiduciary duty is further developed.

Kay’s Review, which was published back in 2012, was a major step in downgrading the importance of expected short term asset price movements and opened the door to longer term considerations like ESG becoming universal.

Last summer’s report by the Law Commission – Fiduciary Duties of Investment Intermediaries – took us further down the road of considering long term implications as being paramount. When specifically addressing trust-based pensions, the Law Commission concluded that “the primary purpose of the investment power given to pension trustees is to secure the best realistic return over the long-term, given the need to control for risks.”

Financial factors must outweigh non-financial factors in a DFM’s decisions

The above Law Commission report also clearly extracts the duty to prioritise financial factors over non-financial factors. The ESG filters that a DFM deploys must be done so as to remove stocks that will suffer long term loss of value through poor ESG rather than simply because we want England to be a green and pleasant land. Water companies that discharge sewage to rivers should be excluded from portfolios because they will be fined by regulators, not because we like our rivers to smell nice.

We are learning new ground as to what constitutes a financial factor

Groundbreaking work this year by global law firm Eversheds Sutherland alongside NatWest Cushon has thrown light on what constitutes a financial factor.

And it has strong parallels with what Government are trying to do by increasingly directing savers to invest more in the UK, and specifically more in UK growth and infrastructure assets that will boost our economy. Instead of simply sending assets to America and lowering the cost of capital for American firms.

The way I see it is that if the client’s objective is saving for a comfortable retirement, and if Pension UK’s basket of what constitutes a comfortable retirement includes taking the grandchildren by train on a London outing, then investment in railway infrastructure that provides “elderly-friendly” accessibility to public transport will help to meet the client’s needs, alongside providing an investment return and generating more jobs for those installing lifts at our stations.

The importance of acting in concert

Crucially though, one DFM firm handling a small number of client portfolios is never going to make a difference to the wholesale UK infrastructure overhaul that we are going to need to make the UK a more comfortable place for our ageing population. Therefore, what DFMs need to do in adopting this sort of approach is to lift their horizon, to see what other DFMs are doing and to see what they can cajole other DFMs into doing alongside them.

It is when investors act in concert together that we can improve the economy, the environment and the society that we will retire into. Because when we act together (and the Mansion House Accord is an example of pension trustees acting together) our actions will have real consequences that can be considered a financial factor in fiduciary terms. Whilst we may expect the Mansion House Compact and Accord to increase the demand for infrastructure type investments, there is unlikely to be a shortage of good quality investments. They have proved particularly popular with both Canadian and Australian pension funds in recent years, so we may now see some of that hitherto international funding being replaced by domestic investors. It is also worth noting that the Mansion House agreements are voluntary targets – they don’t overrule the fiduciary duty of the trustees that have signed up to them and they can and will undershoot their targets if there are not enough good UK based investments.

A changing pattern of investing in the UK will follow, slowly at first, then gathering pace with a snowball effect. Good DFMs will be getting in the right step now, while prices are low, and their clients will gain the most from the ensuing changes.

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