Diligent evaluation

How to get the most out of your relationship with your DFM.


Discretionary fund managers (DFMs) have been gaining traction among tied and independent financial advisers, accounting for about 20% of the total assets under management in the SA retail market. The rise in DFM solutions can be ascribed to the DFM’s role in negotiating better fees for underlying investments. Any credible DFM will be fully transparent in terms of fees and the reasons for its preference around underlying funds or strategies. The availability of solutions across multiple platforms is also often quoted as a prerequisite for appointing a particular DFM.

However, not all DFMs offer the full range of capabilities, and advisers should consider their services. The adviser should conduct a thorough due diligence on any potential DFM to evaluate whether it possesses the necessary capabilities to assist the adviser in meeting the varying needs of its clients. At the very least, the due diligence should evaluate the DFM’s investment skill, level of independence, investment manager research capability, appropriateness of its quantitative tools, portfolio construction process, as well as the level and frequency of portfolio attribution and reporting.

We believe the relationship between a DFM and an adviser needs to be reflective of a partnership.

Each client’s needs differ and advisers should consider available solutions to suit these needs. Momentum Investment Consulting (MIC) now manages more than R7-billion in assets locally, while our offshore team in the UK manages a further US$5.5-billion. Our clients range from category I advisers to category II licensed advisers and we offer the full range of services. We believe the relationship between a DFM and an adviser needs to be reflective of a partnership, where advisers determine what investment needs they have and MIC will solve for this, executing either through model portfolios or fund of funds.

We follow an outcome-based (or goal-based) investing philosophy, allowing us to construct portfolios that cater for specific outcomes over the relevant time frame. We evaluate different strategies within each asset class and our portfolios can include passive, smart-beta and active strategies (or combinations of these). This flexibility allows us to bridge the gap between investments and advice, allowing advisers to select the most suitable portfolio for each client’s needs.

As asset gatherers, we are often able to access investment mandates not usually available to retail investors and we can sometimes also get access to preferential pricing from the underlying investment managers. These benefits are passed directly on to investors, resulting in better investment outcomes. Investors should evaluate the DFM in the same way they do any investment manager. If your DFM isn’t able to give you consistent investment returns over the relevant time frame (after deducting all investment fees), you should be shopping around for an alternative.

Florbela Yates, Head of Momentum Investment Consulting at Momentum Investments

Arguably, the most important decision advisers face in the selection of a DFM is its compliance with legislation. Check whether they are compliant with all aspects of the Financial Advisory and Intermediary Services Act and the effect that following the Treating the Clients Fairly principles will have on their business. With the onset of the Retail Distribution Review (RDR) legislation, which is expected to be passed in the foreseeable future, it is also important to determine whether the selected DFM is RDR ready and, if not, what its plans are to ensure compliance. DFMs lessen the compliance burden for your advice practice, making your business more efficient.

If you think you could benefit from a partnership with a DFM, make sure you enter into that relationship with the expectation that it will be with you for the long haul and that you plan for the unexpected and have the necessary contracts in place.

For more information on Momentum Investment Consulting, email us at mic@momentum.co.za.