A large number of advisors are using the services of Discretionary Fund Managers (DFMs) and more are expected to follow. But advisor surveys reveal many do not want to use DFMs and that it may not be cost-effective to do so. There are alternatives, but they come with their own drawbacks.
Using a multi-manager
Using a multi-manager that does not offer a DFM service is one option. Barry O’Mahony, financial advisor and founder of Veritas Wealth, says that when you use a multi-manager for your clients’ investments, you sit in the audience and get told what has happened in the multi-manager’s portfolio; and that this differs from the process followed when you use a DFM; with a DFM, you can provide input on the decisions and understand the case in front of you. It is a much healthier exercise than to just look on as you do when you use a multi-manager.
Combine well-known managers
Many advisors who do not use a DFM simply pick the balanced funds of three or four good investment houses and combine them. However, this approach fails to take into account the managers’ different styles and whether or not they complement each other in a way that improves diversification. Ian Beere, chairman of Netto Invest, says a common approach used by some advisors in the past was to approach three well-known managers to provide portfolios of their funds that match each strategy and then to combine the three offerings. Beere says the problem with this was that the resulting investment solution is made up of three separate portfolios and there is no consideration of how they work together as a whole. A DFM would consider the whole portfolio and how each part complements the other in a sound process.
While Netto used outsourced investment research when it was a smaller practice, it now has the capacity to run its own house view portfolios and outsources aspects of the research. The house view portfolio allows Netto to accommodate clients who have specific requirements. Asset allocation decisions are the primary reason for the difference in returns between multi-asset portfolios with different risk profiles, Beere points out. For this reason Netto prefers its house view portfolios to include more than one tactical asset allocation decision. Netto’s solutions include active funds, multi-manager and passive components so that clients benefit from asset allocation decisions in each, he says.
A simple alternative for advisors who do not want to use a DFM would be to invest in the balanced funds of a well-known fund manager with a good track record for each strategy and complement each with an appropriate passively managed balanced fund and multi-managed fund, Beere suggests.
Manage money yourself
O’Mahony says advisors who do not want to use a DFM can manage portfolios themselves if they have a Category II licence under the Financial Advisory and Intermediary Services Act. Veritas does not have this licence as O’Mahony and his partners believe the business can offer more value in giving financial advice than managing portfolios.
He says Veritas would have had to employ someone to take on the role of researching asset allocation, portfolio construction, asset manager selecting, how to blend managers and other areas required to successfully manage portfolios. And it would then have only had the input of one person instead of the highly qualified team its DFM employs.
Craig Gradidge, co-founder and financial advisor at Gradidge-Mahura Investments, says GMI researched its own investment options until it had enough assets under advice to make using a DFM cost-effective. He found using a DFM freed up a lot of time he had spent attending manager presentations, doing due diligences on managers and getting clients to complete switch forms when managers needed to be changed. Gradidge says using a DFM also broadened the list of offshore investments that could be accessed for clients as he had previously used only managers licensed to market their investments in South Africa in line with section 65 of the Collective Investment Schemes Control Act.
Invest in passive funds
O’Mahony suggests using the passive or index-tracking version of the mandate is another option. There are now index-tracking balanced funds and Veritas previously used the passively managed balanced funds managed by an established asset manager for its clients. Passively managed funds may not always deliver the smoothest ride to an investment outcome, but O’Mahony continues to monitor how these investments perform and to use it as a benchmark for the performance of Veritas’ chosen DFM partner.
