BLUECHIP2025 DFM GUIDE -
BLUECHIP2025 DFM GUIDE - INTRODUCTIONWhat is a DFM actually?DFMs provide advisors with well-managed and defendable solutions.ADiscretionary Fund Manager (DFM) provides professionaland expert investment services to financial advisors,relieving them of the job of researching, choosing andblending different managers into investment portfolios fortheir clients. A Discretionary Fund Manager has the necessary licenceand mandate to buy and sell investments on behalf of clients.Regulation of financial advice processes, including the FinancialAdvisory and Intermediary Services (FAIS) Act in South Africa, hasfuelled the growth of DFMs that meet financial advisors’ requirementsfor well-researched and managed portfolios that are matched toclient needs.South African DFMsThe first South African DFM, Analytics was spun out of Investec in 2004as the FAIS Act became effective.Since then the number of DFMs operating in South Africahas increased to around 60, according to Pat Magadla, head ofdistribution at Equilibrium, the DFM in the Momentum group.The latest NMG Consulting survey of South African AdviceModels notes that R315-billion of assets advised on by independentfinancial advisors, excluding that of advisors in networks, aremanaged in conjunction with a DFM. Including advisor networks,the investments managed by DFMs is estimated to be betweenR450-billion and R600-billion, according to the CollaborativeExchange’s 2023 DFM survey.The NMG Consulting survey shows that 57% of South Africanfinancial advisors are using DFMs’ investment services and 73% ofthem are expected to increase their DFM usage in future.DFMs are effectively multi-managersWhile all DFMs are effectively multi-managers, not all multi-managershave DFM business models that are geared to providing businesssolutions for financial advisors.Single managers, multi-managers and DFMs are all investmentmanagers who offer unit trusts funds, and their funds can be directlycompared on performance, cost and consistency.But what differentiates a DFM is that their products are craftedinto holistic solutions for advisors and their clients.Good DFMs will ensure advisor partners have a comprehensive setof investments that is integrated into their advice process and alignswith their value proposition.A credible investment partner frees advisors from distractions andallows them to focus on the client conversations.How they are regulatedSouth African DFMs must be registered as a financial services provider(FSP) with what is known as a Category II financial services providerlicence under FAIS that allows them to manage investors’ money ona discretionary basis.DFMs must abide by the Code of Conduct for Administrative andDiscretionary FSPs published under FAIS by the Financial SectorConduct Authority (FSCA).4This code binds DFMs to obtain a written or electronicmandate with their clients after obtaining information about theircircumstances, needs, objectives and other information required toprovide a suitable service.It also obliges DFMs to provide written reports that include themarket value of the investments and show the charges at least onceevery three months and on request.The FSCA’s 2019 Retail Distribution Review document madesome proposals about formal agreements, conflicts of interest anddisclosure of portfolio and fees. Further regulation is expected whenthe Conduct of Financial Institutions Bill is enacted.Qualifications and experienceA DFM should have a diverse and experienced team to provide awider perspective on investment decisions.A DFM team may include qualified actuaries, accountants andholders of the Chartered Financial Analyst, Chartered AlternativeInvestment Analyst and Certified Financial Planner qualifications.Services offeredThe investment products and services that DFMs offer are standardmodel portfolios (reflecting their best investment view), or highlycustomised (bespoke) solutions suited to specific clients.Financial advisors with either Category I or Category II financialservices provider (FSP) licences make use of DFM services.Some Category II advisors primarily engage DFMs forasset consulting, while using their own Category II licence toimplement portfolios.Other advisors rely on DFMs not only for asset consulting butalso to implement portfolios on their behalf, either as modelportfolios or as unit trust funds on investment platforms.In order to facilitate bulk switches when portfolio changes arenecessary, DFMs, in conjunction with an advisor partner, must obtainsigned investment mandates from clients. These documents mustcomply with the FSCA’s requirements.DFM’s managed investment solutions or consulting services arelikely to come with:• Determination of appropriate risk and strategyJonel Matthee Ferreira, CEO of Cogence, the discretionary investmentmanager in the Discovery Group, believes that the investment processshould start by defining the investment objectives of each solutionidentified as suitable for clients before the appropriate investmentrisk and strategy is determined.• Asset allocationGeorge Dell, executive director at DFM MitonOptimal, is of theview that a DFM does its job effectively and efficiently when it doesasset allocation. In order to create an investment thesis, a DFMmust understand the payoff profile of asset classes in the past, andhave a reasonable forecast for those assets classes’ future returns,he continues. If a DFM is just choosing the best performing fundswithout doing asset allocation or trying to understand the behaviourof asset classes, they will do clients a huge injustice, he says.
2025 DFM GUIDE - INTRODUCTIONBLUECHIPDFMs consider forecasts for global asset class returns, risk anduncertainty and combine these with insights into the optimalallocation to determine a strategic or long-term allocation that drivesmost of the risk and return, Matthee Ferreira explains.DFMs also use dynamic or tactical allocation to adapt the longtermstrategic asset allocation to take advantage of the currentmarket environment, potentially adding additional alpha, she says.• Manager selectionResearching, screening and selecting fund managers is a key servicethat DFMs offer.There are now more than 1 800 local collective investmentschemes and many thousands more globally, making the selectionprocess complex. A DFM has the investment skills required forthis and can do so with efficiency since it will serve severaladvisory practices.• Portfolio and risk managementOnce managers have been selected, DFMs typically review theoverall portfolio, often using their technology platforms to determinethe investment risks and how these can be managed.Potential future risks should be stress-tested under differentmarket scenarios and asset classes are researched to determineoptimal diversification benefits and reduce volatility, Matthee Ferreirasays. Continuous monitoring and rebalancing helps to ensure thatportfolios work well through time.• Standard and customised portfoliosIt is generally accepted that DFMs reduce complexities and minimiseinvestment compliance risk in advisors’ practices, which is achieved byconsolidating and centralising clients’ portfolios into the appropriateand consistent strategies for advisors.However, aligning every client’s portfolio to these strategies canbe challenging as many clients use different investment platformsor hold existing investments they prefer to retain or transition out ofgradually. Funds required for a tailored portfolio may not be availableon platforms with limited choice, but DFMs can identify suitablealternatives to meet the asset allocation strategy.In some cases, advisors’ clients are not willing to move to thepreferred platform. DFMs also have a solution for this: a suite ofcore portfolios can be offered on each platform so advisors can usethese as an alternative when they do not have sufficient assets tojustify their own tailored model portfolio on the platform a clienthas chosen.• Communication and complianceOnce a centralised investment proposition is established, advisorscan effectively communicate with investors and DFMs assist with thisby creating fact sheets for each investment portfolio. These may bebranded for an advertiser to share with clients.In addition, DFMs usually host investment committee meetingswith advisory practices. These meetings ensure advisors have athorough understanding of the portfolios, including componentssuch as alternative investments like hedge funds, the performance ofindividual investments and the rationale for any adjustments beingmade. This collaboration empowers advisors to keep clients informedand confidently address their questions, Dell explains.A DFM’s support for an advisor should extend to standingbehind its portfolios, he says. If an advisor partner is challenged bya client or faces a complaint lodged with an ombudsman, the DFMcan step in to represent the advisor, explaining and justifying theinvestment decisions.Matthee Ferreira says a valuable role DFMs can play for advisors isto provide them with information to explain to clients the impact ofpotential market events on their goals and help them make informedinvestment decisions.In addition, DFMs can help advisors show clients the impact ofsavings habits, health and the impact of longevity on financial needsin retirement, she says.• Add-on servicesMany DFMs offer add-on services such as signing up or on-boardingclients, and additional propositions include planning tools, assistancewith practice management, access to portfolio managers andthought leadership.Types of DFMsThere are probably three distinct types of DFMs:• The independent retail DFM: Independent, owner-managedDFMs with no corporate ties that serve independentfinancial advisors.• The in-house DFM: DFMs run as separate businesses withinlarger wealth advisory businesses.• The corporate DFM: DFMs within large life insurers or financialservices groups. They mainly serve tied financial advisors but canbe used by independent financial advisors. Recently a numberof corporates, including Discovery, Momentum and Alexforbes,have built DFMs out of their multi-manager businesses.There are also advisory businesses that have their ownCategory II licence and give advice and manage investmentson behalf of clients. These businesses continually have to balancethe costs and benefits of doing their own investments versus usinga DFM. Some of these businesses do use a DFM as a consultant to helpthem manage their investments, but they – rather than the DFM –take full responsibility for the investment outcomes.Matthee Ferreira reveals that Discovery launched a corporateDFM because the group recognised that a DFM can helpadvisors grow their practices and manage advice risk bystreamlining their investment propositions. A centralised,repeatable investment approach leads to better outcomes byreducing poor investor behaviour, boosting satisfaction andimproving client retention.Brandon Zietsman, global CEO of PortfolioMetrix, alsohas an explanation for why corporates are launching DFMs:large financial institutions have a plethora of products anddistribution channels. They offer single manager investments,multi-manager investments, alternative investments, propertyinvestments and more through private bankers, financial advisorsand tied agents, he says.Tied advisors in these institutions can choose whatever fundthey like on the group’s investment platform. To ensure theseadvisors can compete with independent financial advisors,their choices are not restricted but this also results in a lackof control over the funds used, the asset allocation and local andoffshore split, Zietsman says.The result is a lack of consistency and a lot of regulatory risk, hesays. Zietsman says launching a DFM resolves these problems forfinancial institutions.While independent advisors can use corporate DFMs, theytypically prefer DFMs that are independent of any group and havelong track records, he adds.5
