How DFMs deliver for financial intermediaries and their clients

By: Roland Gräbe, Head of Discretionary Fund Management at Old Mutual Wealth

Roland Gräbe

South Africa’s discretionary fund manager (DFM) universe is expanding rapidly as financial intermediaries take advantage of the many benefits they offer. The model portfolios offered by the country’s leading DFMs give advisers access to a range of investment opportunities and tailored investment strategies while assisting with the administration, compliance, and portfolio monitoring and management functions that advisers must perform for their clients.

By using DFMs, financial intermediaries can invest their clients’ money in cost-effective and risk-and-return-appropriate model portfolios. These portfolios offer clear wins to all stakeholders in the process in that they are typically more attractively priced than the average balanced unit trust, while offering comparable investment returns. Independent financial advisers (IFAs) are also flocking to DFMs for assistance with their advice obligations under the country’s pro-consumer financial advice regulation. Most notably, they appreciate the administration and compliance ‘time savings’ that the DFM solution introduces.

It is critical that financial advisers partner with the right DFM. Since the regulatory hurdle to operate a DFM is fairly low, the market comprises a mixed bag of operators, from highly qualified ‘top tier’ multi-managers to small financial services providers (FSPs). To get this choice right, financial intermediaries will therefore have to undertake comprehensive due diligence on the 50-plus brands they could encounter in this space.

It helps to consider the competition on four measures: size, service, price, and performance. To thin out the competition, you should choose a DFM that has significant assets and scale and the capacity to perform most of the requisite fund management functions in-house. IFAs that remain unsure of their choice can additionally ‘rank’ DFMs based on performance in two areas. First, on the scope and suitability of the model portfolios they offer. And second, on the diversity and quality of asset managers incorporated into their solutions.

Exemplary service is the ticket to play in the competitive DFM environment, while price (or fees) and performance (or returns) are factors that your clients often obsess over. Allow me to expand on some of these factors.

We work with a multi-management team that looks after assets in excess of R100 billion. This team is highly qualified with diverse skills and experience in manager selection and portfolio construction. We also make use of their expert skills in economic analysis and quantitative modelling. All of our DFM investment decisions can thus be informed by both qualitative and quantitative information. In our world, we consider the people, performance, and philosophy of an asset manager under the qualitative label, while quantitative factors include the size of the asset manager alongside individual fund metrics like liquidity, performance, and risk.

A DFM of our size is able to charge DFM fees of as little as 0.1% (or 10bps) with most of the model portfolios boasting total investment costs of less than 1% on a Total Investment Cost (TIC) basis. Advisers and their clients benefit because we do not have to pay third parties for both asset allocation and stock selection functions, thus making our DFM model portfolios cost-effective in comparison to balanced funds.

Innovative investment strategies are also worth considering. Old Mutual Wealth is not afraid to innovate in the discretionary fund management sphere and is currently using passive indexation and alternative passive strategies to optimise model portfolios within its DFM offering. We are early adopters of cost-effective ESG driven indexation and also make use of market leading smooth bonus fund strategies to create unique solutions for the living annuity market.

To conclude, a DFM adds value to financial advice practices by saving advisers time and making client engagements more efficient as well as professionalising the investment process itself. In addition to offering your clients lower investment fees, the DFM model portfolio approach gives advisers an edge in of the investing stakes. It is also worth noting that there is only one party in charge of asset allocation within our model portfolio approach. This not only eliminates the asset allocation ‘overlap’ that advisers encounter in a fund-of-funds approach, but controls risk whilst ensuring asset manager diversification at an asset class level.

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