BLUECHIP2025 DFM GUIDE -
BLUECHIP2025 DFM GUIDE - INTRODUCTIONWhy should a financialplanner use a DFM?Discretionary Fund Managers save advisors a lot of time.They can also provide more robust and diversified portfolios,cost-efficiencies and ensure clients are treated fairly.Financial advisors who make use of a Discretionary FundManager (DFM) to manage investment portfolios can savethemselves not only time but also set up more robust andcost-effective investments for clients.The benefit of outsourcing portfolio construction andmanager selection to a professional team is obvious for asmall practice, but even larger ones with advisors who knowthe investment markets may benefit from the expertise, therange of underlying investments and fee discounts that DFMscan offer.Saving time to be with clientsWhen DFMs take over the role of managing investments onbehalf of an advisor’s clients it can save valuable time thatadvisors can then put into their relationships with their clients.Managing investments is a big job as there are over 1 800registered collective investment schemes in South Africaalone, before you consider offshore options and alternatives.It is a mammoth task to stay on top of developments in eachfund and then consistently sift through the heap to find the bestperforming fund, remain on top of the operational ability andinvestment philosophy adherence of each, says Palesa Dube,founder of Centillion Wealth and a recent winner of the FPIFinancial Planner of the Year.Dube took the view from the onset in her practice that, inorder to provide clients with the best available opportunitiesin the market, the asset management aspect of managing theirinvestment portfolios required much more attention than sheand her team had the capacity to fulfil.It made sense then to partner with a DFM, she says.Ian Beere, chairman of Netto Invest and a previous FPIFinancial Planner of the Year, says financial planners shouldspend their time with clients, guiding them on how to reachtheir goals by adjusting their level of investment certainty andexposure to growth assets.In addition to this core task, Beere says advisors need toconsider how clients can achieve tax efficiency, manage theirspending, plan their estates and be cognisant of where themarkets are at, to advise on investing, disinvesting and switching.With this core role, his view is that an advisor in a small practiceshould not want to spend the time behind a spreadsheet lookingat the whole of the investment market to determine which funds6
2025 DFM GUIDE - INTRODUCTIONBLUECHIPto recommend to clients, monitoring the relative performanceof the funds and making changes when necessary.If your practice has the capacity and experience in its team,you can dedicate professionals in your practice to do this work,as Netto Invest does, he says. However, in the practice’s earlierdays when it had fewer resources, Netto benefitted hugely fromusing an independent investment business.Sound processDube says Centillion’s DFM partner assists her practice byproviding a sound framework and philosophy within which tonavigate and structure investment portfolios for her clients.Beere puts his finger on the key problem that DFMssolve for advisors: identifying and defending investmentrecommendations – the DFM’s research demonstrates that allsimilar suitable investments have been considered and theinvestments selected using a sound process.When your advisory practice is small, it makes sense to sharea DFM-appointed research team that can choose investmentsinstead of each practice trying to have its own research team,Beere believes. Using a DFM can unlock efficiencies and makemuch better research affordable for an advice business. TheDFM has a scientific and disciplined process, optimises the assetallocation decisions and manages the risk-return metrics.Access and expertiseBarry O’Mahony, founder of Veritas Wealth and a former FPIFinancial Planner of the Year, points out another big benefitof using a DFM – the DFM gets greater access to the portfoliomanagers within the asset managers.Also, advisors tend to get access to skilled salespeople, whileDFMs with much larger client bases get to sit with the portfoliomanagers and do deeper research.In addition, O’Mahony’s experience is that DFMs’ teamshave more qualified professionals – often those with theChartered Financial Analyst qualification – who can ask moremeaningful questions.He points out that Veritas could have employed one person toresearch managers for its clients, but that one person would notbe able to achieve the same depth of research or have access tomanagers in other parts of the world as DFMs do.Cost-effectiveO’Mahony recounts that before appointing a DFM, Veritas used amulti-manager and passive investments for its investment options.Its Category I Financial Services Provider licence gave it accessonly to offshore managers registered in South Africa. Veritasengaged a DFM for offshore portfolios and quickly saw that thecosts were lower.Veritas then realised its DFM could do better research on localmanagers as well and moving its clients into DFM-managedportfolios simplified its investment management. Veritas ishoping bigger cost savings will be achieved in future.Craig Gradidge, independent financial advisor and co-founderof Gradidge-Mahura Investments, recalls that initially heresearched, selected and blended managers into investmentportfolios for his clients himself as it was more cost-effective todo so while his advisory business was growing.Once the business reached R1-billion of assets under advice, itwas taking on new advisors and growing quickly, and using a DFMbecame more cost-effective, allowing Gradidge and his partnersto streamline the application of their investment philosophy.It also freed him up from having to attend fund managerpresentations and due diligence on any new managers the teamof advisors considers introducing.Fair treatmentUsing a DFM also helps a financial advisor to treat all clientsfairly because when the DFM decides to make a change in anyportfolio, it can be done on each investment platform for allclients at the same time.Advisors wanting to make changes to portfolios have tomeet clients one at a time to get their consent, and it cantake 12 months to get to all the clients to do switches. Youhave to decide who will benefit from the change first,O’Mahony says; it feels better to have changes executed forall at the same time.Pat Magadla, the head of distribution at Equilibrium,explains that when DFMs use their Category II FSP licence toperform bulk switches, treating clients fairly (TCF) principlesare observed.Any compliance risk is removed because asset allocationor fund changes are applied simultaneously across all clients,ensuring a consistent investment experience. Bulk switchesalso improve efficiency by eliminating the need to meet eachclient to get signed consent for portfolio changes.Gradidge appreciates that there is always consistencyacross client portfolios and observes that using a DFM hassaved his clients a considerable amount of time and theinconvenience of signing numerous switch forms at eachmeeting for different retirement and discretionary portfolios.However, Beere points out that if the bulk switch will incurcapital gains tax for the investor, then this needs to be givensome consideration.Aligned to adviceAnother advantage of using a DFM Beere identifies is that DFMscan align portfolios to how advisors are giving advice. Advisorstypically use a few key methodologies:• The maximum return methodology, in terms of which clientshave five years’ worth of income in cash and the rest in equitiesin order to achieve the best return;• The bucket methodology: five years of income in cash andthe next five years in a balanced fund and the remainderof the money in equities, with the buckets topped up asrequired; or• The real return methodology: you invest in a total returnstrategy and allow the asset managers to tweak the portfolioin line with what the markets are doing.When a DFM manages portfolios, it can customise them toalign with how clients are coached to think about their money,Beere says.Gradidge notes that he chose a DFM that would implementthe investment philosophy his practice was already usingsuccessfully. He did not want to adopt a DFM’s philosophy andportfolios it had built for all partner advisors to use.7
