The five Ps of choosing your investment partner

By: Roné Swanepoel, Business Development Manager at Morningstar South Africa

Roné Swanepoel

Outsourcing investment management has become very popular among financial advisers for several reasons. Although the adoption of a DFM in your practice can significantly free up your time, add value to your clients, and assist with the future growth of your business, partnering with the right DFM for your business is a crucial decision.

What are the key elements to consider when choosing an investment partner?

#1 People

When partnering with a DFM, the overall quality of the investment team is key to determining their ability to deliver consistent outperformance relative to benchmark and peers. It is important to understand the structure of the team, the size of the team, their access to data and systems needed to make investment decisions, and how decisions are made within the team.

Although the investment team is key to the success of client portfolios, the operations and service teams form the backbone of the day-to-day success of your business. Partnering with a DFM sees that team become a part of your business, and exceptional service and an end-investor focus from your DFM partner should be front and centre when you are in the process of deciding to partner with a DFM.

Some questions to ask: 

What is the size and experience of your investment team? 

Do they form part of a global team or are decisions made by a small number of individuals? 

How are decisions made within the investment team? 

What support will be provided from a business development perspective?

#2 Process 

When it comes to the investment process, it’s key for a DFM to have an independent, understandable, repeatable and consistently applied global investment process. Just as independence lies at the heart of effective financial planning for clients, it also plays a pivotal role in the success of a DFM’s proposition. Ensuring your investment partner is fund-agnostic, platform-agnostic and management-company-agnostic should be a key consideration when deciding who to partner with.

With client needs extending to include more offshore investments, having a global process and global footprint become important. Partnering with a DFM with a truly global presence can add an immense amount of value to your clients and business.

Some questions to ask: 

Are you platform-, fund- and manco-agnostic when constructing and running portfolios for clients? 

Are you able to explain your investment process? 

How is your investment process implemented? 

How do you manage risk within your investment process? 

Do you have a strong global presence and global investment capability?

#3 Parent 

Understanding the core values of your potential investment partner will ensure you partner with a DFM that is aligned in terms of the values you consider important in your business. ‘Like-mindedness’ and the treatment of the end investor are paramount when considering the parent of your potential investment partner, and those companies that are good stewards of capital are those that act in investors’ best interests in all aspects of managing client portfolios.

A key element is to look for an investment partner that has a culture of stewardship and puts investors first, and less to those that are too heavily weighted to salesmanship.

Some questions to ask:

What is your organisational structure? 

How do you recruit and retain talent within the business? 

What is the business strategy? 

How do you ensure the end investor is kept top of mind throughout the business?

#4 Performance 

Although performance should never be the most important value-add when choosing a DFM, it should remain a key element in evaluating the business. By partnering with a DFM, the objective is to improve client outcomes and investor behaviour by incorporating actively managed portfolios, which aim to outperform the peer group and benchmark consistently within your business.

Consistency here is key. By blending different underlying fund managers, a DFM aims to smooth the return that investors experience. Another key consideration is the track record of the DFM in managing client portfolios and their ability to demonstrate this track record.

Some questions to ask:

What is your track record in managing portfolios?

Are the returns shown your true track record or back-tested/simulated returns? 

How do you look at performance in conjunction with risk management within client portfolios?

#5 Price

Although it might not be the only determinant, fees are an important element when it comes to investment returns. A higher Total Investment Charge (TIC) may seem to have a negligible impact on a client’s investment portfolio in the short term; however, in the long term, fees can have a large impact on investment returns. In the same way investment returns compound in a client’s favour, investment charges compound negatively against returns. Therefore, the fees of investment portfolios cannot be ignored.

A key factor to consider when deciding to partner with a DFM is their commitment to minimising costs for investors. One of the ways in which a DFM can achieve this is by negotiating preferred fee classes from the asset managers they work with and passing this through to end investors. Another key factor is the overall DFM fee charged and the transparency of how fees are charged within client portfolios by the DFM.

Some questions to ask: 

Do you get access to preferential fee classes from underlying managers, and do you pass this saving directly back to end investors? 

How do you earn fees within client portfolios?

What is the importance of fees when choosing the underlying managers within your portfolios?

Partnering with the right DFM can help enhance investment offerings, strengthen client relationships, and streamline a business. Together with the adviser, a DFM can bring your clients the best of both worlds.

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