BLUECHIP2025 DFM GUIDE -
BLUECHIP2025 DFM GUIDE - INTRODUCTIONWhat are the alternatives tousing a DFM?There are alternatives for advisors who don’t want to partner witha DFM, but each has its drawbacks.Alarge number of advisors are using the services ofDiscretionary Fund Managers (DFMs) and more areexpected to follow.But advisor surveys reveal many do not want to useDFMs and that it may not be cost-effective to do so.There are alternatives, but they come with their own drawbacks.Using a multi-managerUsing a multi-manager that does not offer a DFM service isone option.Barry O’Mahony, financial advisor and founder of VeritasWealth, says that when you use a multi-manager for your clients’investments, you sit in the audience and get told what hashappened in the multi-manager’s portfolio; and that this differsfrom the process followed when you use a DFM; with a DFM,you can provide input on the decisions and understand the casein front of you. It is a much healthier exercise than to just look onas you do when you use a multi-manager.Combine well-known managersMany advisors who do not use a DFM simply pick the balancedfunds 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 otherin a way that improves diversification.Ian Beere, chairman of Netto Invest, says a common approachused by some advisors in the past was to approach threewell-known managers to provide portfolios of their funds thatmatch each strategy and then to combine the three offerings.Beere says the problem with this was that the resultinginvestment solution is made up of three separate portfoliosand there is no consideration of how they work together asa whole. A DFM would consider the whole portfolio and how eachpart complements the other in a sound process.While Netto used outsourced investment research when it wasa smaller practice, it now has the capacity to run its own houseview portfolios and outsources aspects of the research. The houseview portfolio allows Netto to accommodate clients who havespecific requirements.Asset allocation decisions are the primary reason for thedifference in returns between multi-asset portfolios withdifferent risk profiles, Beere points out. For this reasonNetto prefers its house view portfolios to include more than onetactical asset allocation decision. Netto’s solutions includeactive funds, multi-manager and passive componentsso that clients benefit from asset allocation decisions in each,he says.A simple alternative for advisors who do not want to use aDFM would be to invest in the balanced funds of a well-knownfund manager with a good track record for each strategy andcomplement each with an appropriate passively managedbalanced fund and multi-managed fund, Beere suggests.Manage money yourselfO’Mahony says advisors who do not want to use a DFM can manageportfolios themselves if they have a Category II licence under theFinancial Advisory and Intermediary Services Act.Veritas does not have this licence as O’Mahony and his partnersbelieve the business can offer more value in giving financial advicethan managing portfolios.He says Veritas would have had to employ someone to takeon the role of researching asset allocation, portfolio construction,asset manager selecting, how to blend managers and other areasrequired to successfully manage portfolios.And it would then have only had the input of one person insteadof the highly qualified team its DFM employs.Craig Gradidge, co-founder and financial advisor atGradidge-Mahura Investments, says GMI researched its owninvestment options until it had enough assets under advice tomake using a DFM cost-effective.He found using a DFM freed up a lot of time he had spentattending manager presentations, doing due diligences onmanagers and getting clients to complete switch forms whenmanagers needed to be changed.Gradidge says using a DFM also broadened the list of offshoreinvestments that could be accessed for clients as he had previouslyused only managers licensed to market their investments in SouthAfrica in line with section 65 of the Collective Investment SchemesControl Act.Invest in passive fundsO’Mahony suggests using the passive or index-tracking versionof the mandate is another option. There are now index-trackingbalanced funds and Veritas previously used the passively managedbalanced funds managed by an established asset manager forits clients.Passively managed funds may not always deliver the smoothestride to an investment outcome, but O’Mahony continues to monitorhow these investments perform and to use it as a benchmark forthe performance of Veritas’ chosen DFM partner.10
2025 DFM GUIDE - INTRODUCTIONBLUECHIPShould a financial planneruse more than one DFM?Using one Discretionary Fund Manager (DFM) makes life simpler, butthere are also benefits to tapping into expertise at different DFMs.Most financial advisors in South Africa currently only useone discretionary fund manager (DFM), but some biggerpractices have diversified their clients’ investmentsto benefit from expertise at different DFMs.Pat Magadla, head of distribution at Equilibrium, says advisorstypically only have one DFM, but some may use one for localportfolios and one for offshore.If advisors want to streamline investment outcomes across theirclient base, then using more than one DFM doesn’t make sense,Leigh Kohler, head of DFM at INN8 Invest, says. However, should anadvisor want to use DFMs for different client needs – for example,using one DFM for growth in savings and pre-retirement needs andanother for post-retirement (living annuity) needs, then using twodifferent DFMs could make sense.This holds for managing global investments as well. SomeDFMs don’t have the capability, capacity, skill and experience tomanage offshore solutions – in this case it could make sense foran advisor to have a DFM to run global assets separate to thelocal assets.But Kohler’s view is that advisors should look for a DFM that hasthe ability to run local and global portfolios as there are DFMs whoare able to do this.Income expertiseGeorge Dell, executive director of MitonOptimal, says it is notuncommon for financial advisory practices to use more than oneDFM where a DFM is particularly skilled in an area, such as offshoreinvestments. Dell is aware of a large advisory practice that usesMitonOptimal for its clients’ income portfolios and a competingDFM to manage the pre-retirement portfolios.Kohler does not think it is wise to use more than one DFMto compare their services. Rather, an advisor should avoid thecommon mistake of not doing a proper upfront due diligence onthe DFM before deciding which one to use as not all DFMs are builtthe same, he says.Barry O’Mahony, independent financial planner and founder ofVeritas Wealth, says decisions about whether to use one or moreDFM should depend on the DFM’s capabilities.Some DFMs operate with a dual focus, both local andoffshore, which allows advisors to use one DFM for both local andglobal portfolios.O’Mahony isn’t unhappy with Veritas’ current DFM, butbelieves it is worthwhile checking what is in the market fromtime to time. Veritas therefore plans to review its decision toappoint their DFM and confirm that they made the right decision,he says.Dell encourages advisors to consider several DFMs as partof a thorough due diligence process, as this reassures clientsthat their advisor has carefully evaluated options and chosen thebest fit, while also strengthening compliance with a documentedassessment.Investors will always want to know that their advisor hasconsidered the services that are on offer and made a good choice,he adds.11
