Andrew Finlayson [AF]: When evaluating a DFM, what should you caution against?
Florbela Yates [FY]: Performance is important. I would argue that, as an advisor, you should look at the DFM the same way you would look at any asset manager. If they are not adding value after fees that would probably be a trigger. Unfortunately, the disadvantage is that the model portfolio offering isn’t regulated so it is difficult to compare the performance of one DFM to another. I would certainly be pro the industry becoming more regulated because then you’ve got transparency. But at this stage that’s difficult. From an advisor perspective, the only way to measure a DFM is to check if the portfolio is achieving the outcomes that you’re looking for and how they compare to the peers. You can look at the ASISA category to see what the peer group average is, for example.
The second red flag would be how the fees are shown and how transparent they are. It’s important for advisors and clients to be able to see the DFM fee separate from the underlying manager fees.
The most important thing for a DFM is to remain sustainable to cover your costs
The third point is if the philosophy has changed – so if you as an advisor have asked your DFM to put together a bespoke offering that’s aligned to your advice process and the DFM starts drifting from that, a mandate breach or they just start adding too many funds that you’re not comfortable with or there’s a huge cost drive and they start putting in too many passives just to manage costs, that would probably be a trigger.
Sometimes businesses change, so the reason you appointed a DFM five years ago might be different now and you’re looking for something else. If the DFM you’ve chosen can’t give you that or they haven’t kept up with the tech and you need more tech in your practice, all those things could be a trigger to potentially replacing a DFM.
Internationally we’ve seen a trend where advisors sometimes use more than one DFM. In South Africa, the market is so small I am not sure that it would necessarily be a trigger but what we have noticed is that sometimes an advisor would use one DFM for their local offering and a different one for their international offering and that’s become a little bit more pronounced.
Certainly, at Equilibrium, we are asked more and more to come and speak to advisors who may be happy with the local partnership but want a global DFM to start managing their offshore portion.
Craig Gradidge [CG]: For us, if the DFM becomes a bit too prescriptive in terms of the solutions and asset allocation, then they start to look like another fund manager selling products. Ultimately for us, independence adds enormous value to clients, and it is something we guard quite zealously. So, if the DFM says, “Well, it’s my way or the highway,” then for us, the highway would be what we choose.
Also, if you have a DFM that’s a bit rigid in terms of issues like active and passive management, for example. We’re firm supporters of both, we think both have enormous value. So, a DFM that is a bit too rigid and prescriptive would be a big deal-breaker for us. I think a DFM who does not pay attention to issues like costs and volatility would also be a deal-breaker.
AF: In the DFM space, it seems that scale is important because you have advisors wanting more – whether it be more tech or coverage of more assets. How much of a risk is this kind of race to the bottom from a fee perspective, given what is expected of them?
FY: The most important thing for a DFM is to remain sustainable to cover your costs. As a DFM, you should be able to differentiate your offering so if a client is buying your standard off-the-shelf model portfolio, you probably could discount it versus a bespoke offering because with the off-the-shelf model you build scale in one portfolio range. If you’re running a bespoke offering you need to treat it as a separate range.
My view is that DFMs should be trying to drive overall costs down. You need to compare the total investment charge that you would be paying with the underlying funds as well as the DFM. So, advisors should add the underlying funds plus the DFM fee and compare that to what you would get as an advisor if you went directly to those fund managers and selected them yourself. You would pay the full retail fee in most instances.
I don’t think it should be a race to zero because again if you’re not covering your costs you’re not going to be around. More importantly, it is also the types of underlying assets that you’ve got. The passive component should be cheaper while you pay a little bit more for the active. One should also factor in things like the value that advisors place on portfolio construction; they often can’t do all the underlying portfolio construction holistically so they’re happy to pay a fee for that. It must be an appropriate fee and commensurate with the service that you’re getting.
Meet the panel


