Veritas Wealth probably took longer than most firms to consider using a discretionary fund manager (DFM). We had not made any major errors on behalf of clients, so fear did not play a major part in our decision. What led to the implementation was a change in circumstances.
Our business had suddenly grown from three to five CFP® professionals, and we asked one financial planning colleague to take control of fund selection. However, after a few months it became apparent that the person allocated to the role – although competent and experienced enough to undertake the task – did not feel comfortable taking on a responsibility of that magnitude.
Simultaneously, regulations in South Africa were changing, allowing us to select from a substantial pool of international managers. Fellow CFPs who favoured offshore over locally domiciled funds told us informally that there were better offshore fund managers available than the existing registered shortlist in South Africa. We decided to investigate for ourselves, given that we expected to increase offshore exposure within client portfolios in the long term – especially for wealthier clients who had surplus discretionary savings. If the right partner could improve our selection of offshore assets, we were happy to review our model.
Since the business was founded in 2004, we have not positioned ourselves as investment advisors, although within the Veritas team we have plenty of experience in investing client assets and it was something we could have brought inhouse. Instead, we have always positioned ourselves as Certified Financial Planners, using a powerful but simple philosophy called lifestyle financial planning.
Going this route gave us research scale in our business that would have cost us millions of rands to replicate.
When evaluating client needs, we stay in the planning role as long as possible. This is where we believe we can add most value. However, at a certain point, a plan needs to be implemented.
Where the rubber meets the road
We have always used multi-asset, multi-managed funds and balanced/managed fund mandates and as an independent firm, we were agnostic in terms of active versus passive. Somewhere along the line, we began using balanced funds directly on platforms locally and offshore. That may have been spurred by a particular corporate action or poor performance for a two-year period or simply the need for more options.
Are we happy using a DFM?
We are very comfortable with the DFM we chose. Going this route gave us research scale in our business that would have cost us millions of rands to replicate. As an independent firm, the nagging question for us has always been whether we could do it better ourselves. Ultimately, believing that bringing the investment function inhouse may compromise our independent views, we opted for the DFM route.
Is DFM the answer to everything?
No, it is not a panacea, but we believe it makes our planning process stronger. DFMs showed potential to shift the local asset management industry because of their scale and, in time, to drive down asset management fees in South Africa. Relative to offshore options, South Africa still has quite a road to travel to become competitive. Using a DFM also gives us better access to local and global asset managers at a better price than we could have achieved on our own.
Some financial planners are currently attracted to share portfolios due to the low fees. In the next few years, we think planners and clients will realise how clunky and inefficient running individual share portfolios is. Our expectation is that the multi-managed fund will again be the preferred solution. They are tidier, more tax-efficient and less time-consuming than dealing with a DFM.
The tipping point will likely be when multi-managed funds realise they cannot charge double or triple what a DFM is charging. When this happens, they will re-emerge in the industry. What we would like to see is for multi-managed funds to list and report on underlying funds via their platform, rather than reflecting one line item. Planners and clients will appreciate greater detail and complexity in reporting.
Facing the client, outsourcing the rest
A CFP® professional makes money by being in front of existing or new clients. This means any business functions that can be outsourced should be handed off to service providers to free you up. We are enjoying our relationship with our DFM, which adds enormous value to us and feels like a partner in the business. Our client presentations and plans feel more robust as a result.
As a team, we have an in-depth quarterly meeting with our DFM and can interact with them. This is a change from going to an asset manager presentation, where you feel like you are merely an information-taker rather than a partner. Having said that, as an independent firm we continue to monitor the landscape for any ways in which we can improve implementation of client financial plans.