Financial advisors who make use of a Discretionary Fund Manager (DFM) to manage investment portfolios can save themselves not only time but also set up more robust and cost-effective investments for clients. The benefit of outsourcing portfolio construction and manager selection to a professional team is obvious for a small practice, but even larger ones with advisors who know the investment markets may benefit from the expertise, the range of underlying investments and fee discounts that DFMs can offer.
Saving time to be with clients
When DFMs take over the role of managing investments on behalf of an advisor’s clients it can save valuable time that advisors can then put into their relationships with their clients. Managing investments is a big job as there are over 1 800 registered collective investment schemes in South Africa alone, before you consider offshore options and alternatives.
It is a mammoth task to stay on top of developments in each fund and then consistently sift through the heap to find the best performing fund, remain on top of the operational ability and investment philosophy adherence of each,
-says Palesa Dube, founder of Centillion Wealth and a recent winner of the FPI Financial Planner of the Year.
Dube took the view from the onset in her practice that, in order to provide clients with the best available opportunities in the market, the asset management aspect of managing their investment portfolios required much more attention than she and her team had the capacity to fulfil. It made sense then to partner with a DFM, she says.
Ian Beere, chairman of Netto Invest and a previous FPI Financial Planner of the Year, says financial planners should spend their time with clients, guiding them on how to reach their goals by adjusting their level of investment certainty and exposure to growth assets. In addition to this core task, Beere says advisors need to consider how clients can achieve tax efficiency, manage their spending, plan their estates and be cognisant of where the markets are at, to advise on investing, disinvesting and switching.
With this core role, his view is that an advisor in a small practice should not want to spend the time behind a spreadsheet looking at the whole of the investment market to determine which funds to recommend to clients, monitoring the relative performance of the funds and making changes when necessary.
If your practice has the capacity and experience in its team, you can dedicate professionals in your practice to do this work, as Netto Invest does, he says. However, in the practice’s earlier days when it had fewer resources, Netto benefitted hugely from using an independent investment business.
Sound process
Dube says Centillion’s DFM partner assists her practice by providing a sound framework and philosophy within which to navigate and structure investment portfolios for her clients.
Beere puts his finger on the key problem that DFMs solve for advisors: identifying and defending investment recommendations – the DFM’s research demonstrates that all similar suitable investments have been considered and the investments selected using a sound process.
When your advisory practice is small, it makes sense to share a DFM-appointed research team that can choose investments instead of each practice trying to have its own research team, Beere believes. Using a DFM can unlock efficiencies and make much better research affordable for an advice business. The DFM has a scientific and disciplined process, optimises the asset allocation decisions and manages the risk-return metrics.
Access and expertise
Barry O’Mahony, founder of Veritas Wealth and a former FPI Financial Planner of the Year, points out another big benefit of using a DFM – the DFM gets greater access to the portfolio managers within the asset managers.
Also, advisors tend to get access to skilled salespeople, while DFMs with much larger client bases get to sit with the portfolio managers and do deeper research. In addition, O’Mahony’s experience is that DFMs’ teams have more qualified professionals – often those with the Chartered Financial Analyst qualification – who can ask more meaningful questions.
He points out that Veritas could have employed one person to research managers for its clients, but that one person would not be able to achieve the same depth of research or have access to managers in other parts of the world as DFMs do.
Cost-effective
O’Mahony recounts that before appointing a DFM, Veritas used a multi-manager and passive investments for its investment options. Its Category I Financial Services Provider licence gave it access only to offshore managers registered in South Africa. Veritas engaged a DFM for offshore portfolios and quickly saw that the costs were lower. Veritas then realised its DFM could do better research on local managers as well and moving its clients into DFM-managed portfolios simplified its investment management. Veritas is hoping bigger cost savings will be achieved in future.
Craig Gradidge, independent financial advisor and co-founder of Gradidge-Mahura Investments, recalls that initially he researched, selected and blended managers into investment portfolios for his clients himself as it was more cost-effective to do so while his advisory business was growing. Once the business reached R1-billion of assets under advice, it was taking on new advisors and growing quickly, and using a DFM became more cost-effective, allowing Gradidge and his partners to streamline the application of their investment philosophy. It also freed him up from having to attend fund manager presentations and due diligence on any new managers the team of advisors considers introducing.
Fair treatment
Using a DFM also helps a financial advisor treat all clients fairly because when the DFM decides to make a change in any portfolio, it can be done on each investment platform for all clients at the same time. Advisors wanting to make changes to portfolios have to meet clients one at a time to get their consent, and it can take 12 months to get to all the clients to do switches. You have to decide who will benefit from the change first, O’Mahony says; it feels better to have changes executed for all at the same time.
Pat Magadla, the head of distribution at Equilibrium, explains that when DFMs use their Category II FSP licence to perform bulk switches, treating clients fairly (TCF) principles are observed.
Any compliance risk is removed because asset allocation or fund changes are applied simultaneously across all clients, ensuring a consistent investment experience. Bulk switches also improve efficiency by eliminating the need to meet each client to get signed consent for portfolio changes.
Gradidge appreciates that there is always consistency across client portfolios and observes that using a DFM has saved his clients a considerable amount of time and the inconvenience of signing numerous switch forms at each meeting for different retirement and discretionary portfolios.
However, Beere points out that if the bulk switch will incur capital gains tax for the investor, then this needs to be given some consideration.
Aligned to advice
Another advantage of using a DFM Beere identifies is that DFMs can align portfolios to how advisors are giving advice. Advisors typically use a few key methodologies:
- The maximum return methodology: in terms of which clients have five years’ worth of income in cash and the rest in equities in order to achieve the best return;
- The bucket methodology: five years of income in cash and the next five years in a balanced fund and the remainder
of the money in equities, with the buckets topped up as required; or - The real return methodology: you invest in a total return strategy and allow the asset managers to tweak the portfolio in line with what the markets are doing.
When a DFM manages portfolios, it can customise them to align with how clients are coached to think about their money, Beere says.
Gradidge notes that he chose a DFM that would implement the investment philosophy his practice was already using successfully. He did not want to adopt a DFM’s philosophy and portfolios it had built for all partner advisors to use.
