BLUECHIP2025 DFM GUIDE -
BLUECHIP2025 DFM GUIDE - INTRODUCTIONWho should pay the DFM its fees?It does cost to use a Discretionary Fund Manager, but the fees can be offsetby cost savings in the portfolios.Investors pay the cost of their advisor using a DiscretionaryFund Manager (DFM) and advisors typically do not reducetheir fees to offset the cost of a service they have outsourced.Instead, the fees are offset by the cost savings DFMs achieve.The DFM fee is an asset management fee that is paid by theinvestor for investment management services provided to them,Jonel Matthee Ferreira, chief executive officer at Cogence, says.A DFM aims to provide a more consistent return profilethrough different market conditions to ensure clients reachtheir long-term goals, she says.14Investors should pay the fee because they enjoy the benefitof professionally managed portfolios, Leigh Kohler, head of DFMat INN8 Invest, agrees.Fees offsetGenerally, most established DFMs are able to access cheaperfee classes – fee classes that investors cannot access directly –which effectively means the investor enjoys a professionallymanaged discretionary portfolio that is often “paid for” via thefee discounts accessed by the DFM, Kohler says.
2025 DFM GUIDE - INTRODUCTIONBLUECHIPPat Magadla, head of distribution at Equilibrium, says someadvisors try to avoid a DFM due to the additional layer of costthat the investor bears.However, it is more constructive to understand and outlinethe value that a DFM partnership affords an advisor and theirclients, he argues. The fee provides access to a team of skilledinvestment professionals, that utilise best-in-class tools andtechnology, to make the most appropriate fund choices forinvestors’ portfolios, he says.A DFM can use passive strategies to keep costs low, whereappropriate, but they should never do so if it sacrifices returns,he adds.George Dell, executive director at MitonOptimal, says nineout of 10 times when an advisor partners with MitonOptimal,the overall fees investors pay are the same or are reducedcompared to what they were before the partnership.Dell says passive investments used in portfolio constructioncan keep fees lower. Additionally, DFMs have the scale to accesslower fee classes than individual advisory practices and knowwhich instruments to use to reduce portfolio costs, he says.While DFM fees vary considerably depending on the levelof portfolio customisation offered to an advisor, DFMs offercore portfolios on all platforms with costs as low as 0.18%,he says.Some investment platforms also impose limits on DFM fees,he says. Allan Gray, for example, caps DFM service fees at amaximum of 0.35% of the investment.Ian Beere, wealth manager and chairman at Netto Invest,says DFMs earn their fees by bulking investments and takingresponsibility for the asset allocation decisions.Disclosure issuesDFM fees should be reported to investors on their investmentstatements. The DFM will produce a fund fact sheet for themodel or wrap portfolio and the cost of the underlyinginvestments together with the DFM fee should be disclosed asa total expense ratio (TER), Beere explains.When DFMs manage their portfolios as unit trust funds, theFinancial Sector Conduct Authority (FSCA) requires that allfees and charges, including the TER, total investment chargeand total cost ratio, are reported in the minimum disclosuredocument to ensure transparency.Although it is currently not required disclosure, some DFMsprovide a breakdown of the TER, showing the portion paidto the manager for its investment management services andthe total cost of the portfolio, Dell says.The practice of advisors with Category II licences takinginvestment management fees and advice fees on the sameinvestments, often referred to as “double dipping”, is aconcern for the FSCA. In discussions on investment-relatedmatters as part of the Retail Distribution Review, the FSCAhighlighted that advisors who earn fees for managinginvestments and providing advice face potential conflictsof interest. Dell says the FSCA has suggested that advisorypractices managing their own investments without a DFMmay, in the future, be required to separate their investmentmanagement business from their advisory services.He says some offshore platforms only engage withinvestment managers which requires the DFM to collect boththe investment management and advice fees and to then passthe advice fee on to the advisor.Investment double dippingAnother “double dipping” concern arises when DFMs earn a feeand invest in their own funds on which they also earn a fee.Zietsman says PortfolioMetrix typically does not charge aDFM fee – it prefers to charge an asset management fee in itsfunds and does not double dip when a portfolio invests in oneof PortfolioMetrix’s underlying funds, he says.Any situation where the DFM is conflicted and can potentiallymake more money from a certain decision, will undermine theobjectivity of their choice, he says.DFM add-onsMany DFMs are providing services beyond investmentmanagement to advisors but all their fees are paid for by investorsas investment fees and although advisors are outsourcingsome of their work, they are not reducing their fees.Kohler admits advisors also enjoy the benefits of a DFMpartnership as they achieve greater efficiencies in theirpractices, better investment propositions, access to tools andtechnology and reduced risk, among other things.Zietsman argues that when an advisor’s client invests ina model portfolio and signs an investment mandate with aDFM, the DFM is accountable for suitability risk in terms ofthe Financial Advisory and Intermediary Services (FAIS) Act.He explains that by including tech tools such as risk profilersand cash-flow models in the DFM package, DFMs can ensurea consistent link between advice and the investment solutions.PortfolioMetrix provides financial advisors with its financialpersonality assessment technology along with other tools toensure suitability issues are covered, he says.But DFMs do provide other “free” services to advisors whichcan be a problem when the benefit accrues to the advisor, butthe client is paying, he says.Craig Gradidge, independent financial advisor andco-founder of Gradidge-Mahura Investments, says thecompliance burden on advisors has increased significantly,negatively impacting advisors’ profit margins and resulting inthem opting to outsource to DFMs.However, while advisor margins are reducing, the totalaverage annual costs paid by investors is reducing, he says,citing a survey conducted by NMG that found advisorsand DFMs reporting average annual costs for investors havereduced from 2.14% in 2023 to 2.10% in 2024 and are expectedto reduce to 2% by 2028.Seeing the valueAdvisors and their investors need to know any fee they pay isworth it.Kohler says if the DFM can consistently meet the client’sobjectives on a net-of-fees basis, then the fee is worth it.Generally, the investor’s objective is linked to inflation or aninflation-plus benchmark. It may also be linked to average peerperformance, he says.If the DFM is able to outperform these targets or objectives,then the fees are justified. But it’s important to measureperformance over appropriate time horizons, he adds.15
