Where to Invest a Lump Sum

Is discretionary fund management the answer?

If you’ve got a lump sum to invest, one of the first decisions you need to make is whether you want it to generate capital growth or income or, perhaps, a mixture of the two.

You may have this lump sum due to pending retirement, good savings habits or you’ve inherited some money. Either way, deciding how to get your funds to work hard for you can be a dilemma, particularly in today’s economic and financial climate.

There will be some doctors and dentists that will look to invest in property or a business. These may not be options though that the vast majority is willing to consider due to charges, liquidity and tax implications.

With cash returns at the moment of between 1% and 4%, what other alternatives are there these days to get a decent return on your investment?

For the larger investor, discretionary fund management may be the answer.

Who is a larger investor?

A doctor or dentist with in excess of £100,000 to invest would be considered a larger investor.

Below £100,000, alternative routes such as a combination of bonds, structured products and cash are likely to be more appropriate in meeting your income or growth objectives.

What is discretionary fund management?

Discretionary fund managers create personalised portfolios around your specific investment aims and objectives and your attitude to risk.

Whilst this is what we as independent financial advisers do, regulations restrict us from being able to trade on your behalf without consultation.

As the name discretionary applies, your discretionary fund manager is able to make decisions on where to invest and how to invest your funds on a daily basis without consultation with you at each point. In some cases, they are also able to trade in certain investment areas unavailable to IFAs.

This aside, there are three core benefits of discretionary fund management.

Portfolio rebalancing

When you first invest your lump sum using a discretionary fund manager, your funds will normally be proportionally split up into a number of different asset classes such as stocks and shares, property and fixed interest securities.

As markets rise and fall over time, the proportional split of the asset classes is likely to change too. When it does, your discretionary fund manager will be able to rebalance your portfolio to ensure that it is still reflective of your individual objectives and attitude to risk.

Intermittently, tactical rebalancing may also take place to benefit from short term market excesses.

Reports are produced every 6 months and you receive copies of all transactions made. Most providers also give you online access to view your investment portfolio.

Tax planning

Individuals have a personal Capital Gains Tax (CGT) allowance of £10,600 per annum (2011-2012). This allows an element of investment growth before a potential tax liability is incurred. If you do not utilise your CGT allowance each year, you will lose it.

Discretionary fund management is an effective tax planning tool that ensures you maximise your capital gains allowance each year and minimise your losses.

Your discretionary fund manager will also be able to utilise your annual ISA allowance by automatically applying and investing the relevant funds at the appropriate time.

Existing portfolios

If you have an existing portfolio of investments in place already, you don’t necessarily have to sell it to pass the funds on to your discretionary fund manager.

They are able to take control of your existing portfolio and then, over time, align it with your aims and objectives.

Is discretionary fund management for you?

At Legal & Medical Investments we have the ability to use a wide range of discretionary fund managers.

After your initial consultation with your Legal & Medical financial adviser, he/she would go to the market to find the most appropriate organisation for your requirements.

We would then arrange for you to sit down with a number of providers for you and your IFA to evaluate and decide which one best suits your needs and financial objectives.

Article by Mike Rawson
Independent Financial Adviser at Legal & Medical Investments
August 2011