Sitting with a client and determining the structure of future cash flows, requirements, balance sheets and income statements (a needs analysis) forms the very core of what a financial advisor is.
For example, a pensioner might want to draw down their investment and would require their capital to be relatively safe with little market volatility. Other investors at the start of their career would require a longer-term view and would be prepared to stomach periods of market volatility to obtain higher relative returns.
Investment objectives are usually stated as inflation plus a targeted growth above inflation. The higher the target, the harder it is to consistently achieve it without risking some form of capital or variability of returns.
Once the financial destination has been determined in terms of investment outcomes and risk tolerances, it is over to the investment allocation area of an advisor to choose the best possible portfolio designed to meet those pre-set investment outcomes.
With the complexity of financial markets, both local and global, various asset classes to choose from, a multitude of asset manager funds to choose from, the advisor now really has their work cut out for them. They could choose from various investment models that could cater for their requirements:
- Single Asset Funds, offered by a Licensed Financial Services Provisor (FSP), for example an equity, fixed income, money market or feeder fund.
- Multi-Asset Funds, managed by a single manager, for example a High-Equity Balanced Fund.
- Fund of Funds – a manager will blend different CIS funds together all offered in a Collective Investment Scheme itself.
- House View / Managed Portfolio – a combination of CIS funds and potentially other assets that represent the best view of the selectors at a particular point in time.
It is easy to compare one CIS category manager with another manager in the same category. This was the whole purpose of the ASISA categorisation. An SA Multi-Asset High Equity Fund’s performance cannot simply be compared with an SA General Equity Fund performance due to different risks and underlying asset class allocations. These allocations are not only the manager’s choice, but each ASISA category has certain limits placed on asset classes.
This provides investors with a fair understanding of what they are investing in and whether the fund is suitable for their risk appetite and expected return. A conservative, risk- sensitive investor should not be investing all their savings in an SA General Equity Fund.
A Managed Portfolio or House View portfolio are, however, a blend of different funds across different ASISA categories where not only are the categories blended to achieve investment objective outcomes, but managers of funds within each category are selected based on some measurement criteria.
Asset managers and their offerings have to be researched before investment and there is a very robust due diligence service that is applied to ensure clients’ funds are invested in appropriate mandates, with trustworthy and stable managers that have a proven track record. This forms part of the fiduciary duty an advisor has to their clients.
With over 1 800 CIS funds to choose from, the task of selecting appropriate portfolios is a highly complex one.
Some advisors abdicate this responsibility by choosing a blend of the biggest or most widely known multi-asset funds (for example, a 50/50 split between large manager A and large manager B). If the performance of these portfolios doesn’t return the desired outcome, then it is the manager’s fault for not doing what was expected. This is a very unsophisticated method of choosing investment, but it is the simplest for a practice to explain.
To ensure that clients are getting the best possible blend of investments, an ever-increasing number of IFAs now outsource the construction of their portfolios to a Discretionary Fund Manager (DFM).
There are numerous articles in past editions of this magazine on what a DFM is and what services and benefits they can bring to an Independent Financial Advisory practice (IFA). In short, a DFM provides professional and expert investment services in creating and monitoring suitable investment portfolios for advisor clients.
The DFM industry in South Africa has become rather well developed with many DFMs to choose from (over 60 at last count – February 2025).
DFMs can come in various formats:
- Independent retail DFM – no corporate ownership – fully independent
- In-house DFM – specialist team within larger advisory practices
- Corporate DFM – backed and owned by large companies (financial service providers or insurers)
So, if an IFA has recognised that they do not have the requisite skill of creating appropriate portfolios, how would they go about choosing a DFM?
What differentiates one DFM from another?
In order to answer that, we need to look at the services that a DFM provides their clients. DFMs advertise the fact that their offering is superior to other DFM offerings, and that they can add the most value to advisory practices:
- Setting of investment framework and philosophy in alignment with those of the IFA
- Research of managers (local and global)
- Portfolio construction (asset allocation), risk/return focused core (DFM best view) or customised portfolios (IFA specific)
- Better access to asset managers and their lower-class funds
- Dedicated team of appropriate investment professionals
- Relationship management
- Size of DFM assets under management/advisement
Some DFMs have won industry awards but these are typically voted for by IFAs on qualitative basis on the above services.
Regulatory framework comparison: South Africa, the EU and the UK
The regulatory environment plays a crucial role in shaping the level of transparency and disclosure expected from DFMs. South Africa’s regulatory framework, governed by the Financial Sector Conduct Authority (FSCA), the Financial Advisory and Intermediary Services Act (FAIS) and the Collective Investment Schemes Control Act (CISCA), requires DFMs to provide clear and fair performance and fee disclosure.
However, the degree of standardisation and prescriptiveness lags behind that of the European Union (EU) and the United Kingdom (UK).
In the EU, regulations such as MiFID II and UCITS mandate highly detailed and standardised performance reporting, including risk measures, benchmarking and fee disclosure both pre-contractually and on an ongoing basis. The UK, under the Financial Conduct Authority (FCA), maintains similarly robust requirements, with a strong focus on fair value, risk-adjusted returns and clear, regular client communications. Both jurisdictions require performance to be reported net of fees and place a premium on comparability and investor understanding.
By contrast, while South Africa mandates disclosure of historical returns, risk measures and all associated fees, there is less standardisation, and the frequency and format of reporting can vary significantly between providers. Client communication is subject to regulatory oversight to prevent misrepresentation, but there is room for further harmonisation to match international best practices. Calls for greater standardisation and simplification are growing, with the aim of facilitating easier product comparison and enhancing investor protection.
How can an IFA compare DFM portfolios’ performance?
If a DFM, using its investment prowess, builds specific portfolios (core house view or specialised IFA branded portfolios), why isn’t there a fact sheet per DFM portfolio? One where the decisions taken by the DFM in their choice of constituents and their weighting in a model portfolio can be scrutinised against peers.
Surely this would aid Independent Financial Advisors in choosing a potential DFM partner?
There are additional complications where certain Cat II FSPs amend the DFM suggested model portfolios as they may have different views on certain managers, or asset allocations. These then become the Cat II model portfolio rather than the DFM best view model portfolio. A DFM could have numerous adaptations on their best view model portfolio depending on how many Cat II FSPs want to override their DFM with their own versions.
To ensure that we have captured all these different variations of model portfolios we will henceforth refer to these as “DFM/Cat II.”
Citywire South Africa host an annual DFM award, where entrants compete for performance and service categories. Most awards are aligned to the ASISA categories, six multi-asset categories, equity, fixed income, global, etc. To ascertain these awards, the participating DFM/Cat IIs provide Citywire with a comprehensive set of data for them to use to be ranked.
Citywire uses a proprietary tool to not only analyse data for awards but to also assist individual DFM/Cat IIs in analysing their portfolio characteristics against certain high-level comparisons with other DFM/Cat IIs – such as high-level asset allocation (for example what the equity allocation is in a SA Multi-Asset High Equity model portfolio).
Citywire’s tool relies on DFM/Cat IIs supplying full underlying fund holdings and either gross or net performance for the house‑view portfolios they choose to include, supported by a data‑sharing agreement that restricts use to internal analysis, client reporting and direct client marketing, while prohibiting any public‑domain use and allowing access to be revoked if terms are breached.
The tool aggregates these holdings and performance submissions to create retail asset‑allocation and performance benchmarks, giving discretionary managers visibility into industry‑level trends without exposing peer‑level fund holdings or individual performance.
To ensure data accuracy and integrity, providers must confirm that submissions reflect true client experience, and the system runs quarterly checks by calculating expected performance from holdings; any discrepancies or outliers are queried directly with the relevant provider.
When initially starting this unique project, many DFM/Cat IIs were happy to provide the data but reluctant to be the first ones to be published in performance tables. Being the first to hold yourself out for peer and public scrutiny is not for the fainthearted. So, the understanding was that there would be no disclosure of performance to the market, but Citywire would use this data to calculate the DFM/Cat II awards.
There are currently 44 DFMs that submit data to Citywire SA and according to Brett Powell (Head of Audience Development, South Africa) more than half of DFMs/Cat IIs would now consider having their performance ranked in published tables. This hopefully will be the case as there is more demand from the wider industry with regards to client’s rights to know what they are getting.
There are 18 different categories that Citywire uses in order to align DFM/Cat II house views together to ensure that apples are compared with apples. IFAs and their clients are used to these different categories as they currently exist in the CIS industry already.
Citywire are independent and are at the forefront of making published data available as an industry-led initiative rather than an enforced regulatory requirement, something that can only be good for transparency and the advancement of the industry.
Transparency and Performance disclosure: reluctance and rationale
Despite the clear benefits of professional portfolio management, the issue of transparency, especially around portfolio performance disclosure, remains contentious in the South African DFM/Cat II industry. While transparency is generally promoted to foster investor trust and market integrity, DFM/Cat IIs may have a few legitimate reservations about the open publication of their portfolio performance.
Several reasons underpin this reluctance, but there is always a counter reply.
- Contextual misinterpretation: Performance figures, when viewed without the context of specific mandates or constraints, may be misinterpreted, leading to unfair comparisons or reputational harm.
º Similar mandates need to be bunched to together for any meaningful comparison. The number of contributing DFM/Cat IIs per ASISA categories are as follows:
- ASISA SA Multi-Asset High Equity: 40 DFM/Cat IIs
- ASISA SA Multi-Asset Medium Equity: 24 DFM/Cat IIs
- ASISA SA Multi-Asset Low Equity: 20 DFM/Cat IIs
- Absolute Return investment objectives: 14 DFM/Cat IIs
- Short-term performance volatility: Market fluctuations can distort short-term results, which may not reflect long-term strategy effectiveness, potentially misleading clients.
º But this is exactly what CIS managers face anyway, and as these are the underlying components of most DFM/Cat II model portfolios, advisors and clients should be aware of the dangers of short-termism.
- Impact on client relationships: Clients could react negatively if their portfolio appears to underperform, even if it remains well aligned with their personal objectives and risk tolerance.
º This would, however, result in more transparent communication between advisor and DFM/Cat II as underperformance could at least be quantified and a satisfactory explanation given.
º Yes, it may be hard to explain to your clients why you haven’t won, but they have a right to know how close you got!
- Disclosure of AUM would impact the smaller DFM/Cat IIs in their ability to attract IFAs, as there is comfort in larger organisations in terms of key-man risk, systems, etc.
- Balancing these considerations, DFMs often prefer to manage client expectations and portfolio reviews privately, rather than subject their strategies to public scrutiny.
Conclusion
DFM/Cat IIs in South Africa operate in a complex and evolving environment, balancing the demands of sophisticated portfolio construction, the need to protect proprietary strategies and client confidentiality and the increasing regulatory and market pressures for greater transparency. While regulatory frameworks in the EU and the UK provide models for highly standardised and prescriptive disclosure, South Africa’s approach continues to develop, with industry-led initiatives complementing regulatory efforts.
It all comes back to a few simple questions an advisor must ask their DFM:
- Demonstrate to me that your model portfolios are delivering in line with expectations.
- Allow me to compare similar mandate offerings from various DFM/Cat IIs on a transparent comparative basis.
Imagine picking a CIS manager based on qualitative criteria but not being able to compare how you are doing against other funds in terms of performance!
Doesn’t really make sense, does it?
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His longstanding commitment to the industry reflects his dedication to promoting integrity, innovation and best practices within financial markets.Currently, Adam is a Senior Investment Analyst in the Index and Structured Solutions team at Absa Corporate and Investment Banking (CIB). In this capacity, he leverages his extensive market experience to design innovative investment products and deliver tailored solutions to institutional and retail clients. |
