There is a long list of factors to consider when choosing a Discretionary Fund Manager (DFM), but the most important factors are the experience of the team, their proven performance, their approach to investing and how all these align to your business’ philosophy.
It is relatively easy to check out who is on the DFM’s team, but more difficult to consider performance as there isn’t a lot of transparency or comparability when it comes to the returns a DFM earns for clients.
The DFM team
Pat Magadla, head of distribution at Equilibrium, believes investment skill is the most important factor; the DFM needs an investment team that can offer broad manager research coverage, both locally and globally, and they must have demonstrable asset allocation skills and portfolio construction expertise that is in line with the investment outcomes clients need.
Advisors should consider a DFM’s actual track record and experience of managing assets, according to Leigh Kohler, head of DFM at INN8 Invest.
Advisors should be careful of DFMs without a good record and should instead look for a DFM with an institutionalised philosophy, process and team.
Barry O’Mahony, founder of Veritas Wealth, believes a DFM’s team should include people with the right levels of qualification and experience, who also have access to asset managers.
George Dell, executive director at MitonOptimal, suggests advisors should do a due diligence on several DFMs before they select one. They should consider the people, their qualifications, the structure of the business and how long they have been managing money.
Team size
Kohler’s view is that team size is also important as DFMs must cover both local and global manager research; manage a large amount of both core and customised portfolios; manage reporting; manage client needs and manage risk and compliance management.
According to Kohler, smaller teams struggle to cover these basics and grow their businesses at the same time, so advisors should be sure that their chosen DFM partner is sufficiently capacitated to perform all these functions.
O’Mahony agrees it is important to find a team that can do both local and global portfolios and one that has the ability to execute on a global mandate on an offshore platform.
Considering the investment skills within the team is ultimately aimed at ensuring the DFM delivers good performance.
Performance
Considering the investment skills within the team is ultimately aimed at ensuring the DFM delivers good performance.
O’Mahony believes performance is very important but admits it is still difficult to compare DFMs on the basis of their performance.
Palesa Dube, founder of Centillion Wealth, considers performance important, with an emphasis on optimised portfolio performance and risk-adjusted returns. Overall costs, reporting, ease of engaging and added benefits are also determinants.
Craig Gradidge, independent financial advisor and co-founder of Gradidge-Mahura Investments (GMI), points out that the funds of some advisors who partner with DFMs have won industry awards, but it is difficult to determine if this is a result of the choices made by the advisor or the DFM.
GMI focusses on top-quartile performance but instead of chasing the absolute best performance overall investment periods, its investment philosophy is designed to deliver consistently strong investment performance with good protection against down markets.
Since partnering with a DFM, it has continued to achieve that outcome and GMI has the assurance that it has access to highly qualified people that ensure it is getting a good solution, he says.
Independence
Advisors should also consider whether they want an independent DFM or a corporate that may incorporate its own funds in the portfolios it constructs, Dell advises; and believes there is a lot more flexibility and ingenuity in the independent market. A DFM should be able to tailor-make solutions for an advisor and not just provide ready-made investment solutions.
Gradidge agrees the independence of a DFM is key and that it influences the relationship an advisor can build with a DFM partner.
There are some DFMs that claim to be DFMs, but they are actually multi-managers and not interested in customising portfolios for advisors’ clients.
– Barry O’Mahony, Veritas Wealth
Investment alignment
Jonel Matthee Ferreira, chief executive officer of Cogence, believes advisors should choose DFMs whose investment approach aligns with their own in delivering the best outcomes for clients.
The advisor should be comfortable that the investment outcomes of the portfolios are clearly articulated and that the investment process and philosophy followed by the DFM will result in the desired outcome, she says, and lists relationship management as the second most important factor.
Dube and Gradidge both say that they sought DFMs whose investment philosophy aligned with theirs.
Gradidge says he will not engage with DFMs that only offer off-the-shelf solutions.
Kohler recommends that advisors check whether their chosen DFM provides a “one-size-fits-all”, “cookie-cutter” proposition or if they are able to customise and adapt to the specific needs of the advisor’s practice.
Not all advisor practices are the same – therefore their needs are not the same either, he says.
O’Mahony agrees that there are some DFMs that claim to be DFMs, but they are actually multi-managers and not interested in customising portfolios for advisors’ clients.
A DFM should be able to offer portfolios designed to cater to your client’s specific needs, whether this is capital protection, liquidity or capital growth over their specified time horizon, Magadla says.
Asset size and price
Kohler says that DFM profit margins are low so the size of the assets under management is important for the DFM business to achieve scale.
Advisors must therefore take asset size into account as it is not only an indication of positive economics but also provides insights on client satisfaction, he explains.
Magadla agrees scale is important and says it enables DFMs to negotiate preferential pricing and pass it on to their clients.
Matthee Ferreira’s view is that advisors should always check the price and the value proposition being offered.
Kohler also suggests advisors check the DFM is a profitable and going concern.
Not all DFMs can provide this kind of comfort to their clients but these should be key inputs into the decision-making process of advisors regarding which DFM to partner with.
Gradidge says that the DFM-managed investments offered to a client should be as cost-effective, or better, than any investments you could manage yourself. It should not cost investors more than they are currently paying to benefit from a DFM’s services.
Other factors
Matthee Ferreira lists the other factors that advisors should consider when deciding on a DFM as: their product range, technology and the reporting they do for the benefit of clients.
Dell believes it is important to look for DFMs who prioritise innovation in the products they offer, keeping them competitive and able to meet diverse client needs. In addition, DFMs should provide solutions such as tax-free savings accounts and hedge fund model portfolios and he adds that a capable DFM should ensure their investment solutions are accessible across any platform.
Kohler suggests advisors look for DFMs that are transparent and make their fact sheets freely available on their websites. Magadla recommends looking for a DFM that offers simplicity and operational efficiency. Although the back end may be complex, the financial advisor’s experience should be that the investment management process is easier.
Another important advantage of working with a good DFM, according to O’Mahony, is that planners can learn and develop from working with an experienced and quality DFM.
