To DFM or not to DFM?

26 November 2020 Myra Knoesen

Is there really value in appointing a Discretionary Fund Manager (DFM)? This was a topic of discussion on day two of the Financial Planning Summit.

Covering the latest developments in the financial advisory landscape during the COVID-19 pandemic, leading local and international experts in their respective fields spoke at the event on the future of financial planning, how to set up your practice for continued growth and expansion, as well as many other relevant subjects.

Value in appointing a DFM

In an open discussion panelists Brandon Zietsman, CEO and Head of Investments at PortfolioMetrix, Florbela Yates, Head of Momentum Investment Consulting and Pieter Koekemoer, Head of Personal Investments at Coronation Fund Managers spoke about DFMS.

“In South Africa, at the one extreme end, you have something close to asset consulting or investment consulting where it is more of a collaborative relationship with advisers or an advice firm, monthly or quarterly investment meetings and you will come up with portfolios. So, you could have 30 relationships where you are building a balanced fund, but each is different. At the other end of the extreme is how we engage with advisers, ultimately running stuff under discretion,” said Zietsman.

“What’s common is the relationships with DFMs tend to be strategic and partnership based, as opposed to a vendor situation. It often has to do with a CIP (Centralised Investment Proposition) for the firm. On top of that, there is more work that goes into connecting the roles of advice and investment management. Its more about the relationship with the advice firm and the range of services behind it,” added Zietsman.

Reasons to appoint a DFM

“There are three key reasons to appoint a DFM. The first is for operational efficiencies. DFMs can save advisers a lot of time. DFMs have a license two category, so for example, if an adviser wants to get rid of a fund or introduce a new investment strategy, they need to get a signed switch form from every client. The DFM, with a category two license, is able to make those switches at the touch of a button. From a Treating Customers Fairly (TCF) perspective, this is important,” said Yates.

“The second reason is to align your investment process to the advice process. The DFM tends to get more involved in making sure that they are solving for a particular need e.g. a drawdown and aligning that closely with advisers giving advice. The third, is to make sure clients get better outcomes e.g. driving fees down, giving access to strategies etc.,” added Yates.

Better investment outcomes

“When you cut through all the noise of cost, complexity etc., the only real justification in appointing a DFM is better investment outcomes for the end client,” said Koekemoer.

“It is not all about performance, at the end of the day there is substitutes and alternative strategies. DFMs have to prove  that value add. Advisers who are considering using DFMS should be driving very hard to get that information. Advisers should be subjecting DFMs to the same kind of scrutiny and due diligence as DFMs do to investment houses. You have to carefully consider who you are going to appoint,” said Zietsman.

“What are you looking for when it comes to a DFM? Advisers should assess for consistency; value add and the service they are getting. Fees must be justified, and you also want someone you can build a solid relationship with. Compliance, regulation, governance and legislation have made specialisation more common, which is why you want to partner with experts,” added Yates.

Protect your business

Fiona Ettles, Chartered Accountant at Centurion Market Makers once said, “As financial planners, you know about income protection, and other insurances to protect yourself, but do you know how to protect your business,” she questioned.

Similarly, do we look at various business attributes differently when we buy a financial planning practice? Where is the store of value in a financial planning business?

“There’s the hard metric and technical side of the transaction that you look for, and then there’s the softer side,” said Andrew Möller, Chief Executive Officer at Citadel.

“It is important to consider how systematic the practice is, its scale, advice models and how technical and integrated they are. Does the adviser’s practice have the ability to price up its proposition? What’s the ability and propensity for growth?” said Ian van Schoor, Chief Executive Officer at Adviceworx.

According to Dan Hugo, Chief Executive Distribution at PSG Konsult, the store of value in a financial planning business is based on the ability of the financial adviser to generate a repetitive income.

“It is that ability to generate an income which creates value. How one goes about valuing a firm, is dependent on the elements that form that income stream,” he said.

“Businesses are in different life cycles, and this will determine what you look at. If you cannot on board a practice, with too many regulatory hurdles its difficult to integrate that business. If you cannot integrate, it will be difficult to purchase,” concluded Hugo.

Writer’s Thoughts:
As mentioned above, compliance, regulation, governance and legislation have made specialisation more common, which is why you want to partner with experts. When you cut through all the noise of cost, complexity etc., the only real justification in appointing a DFM is operational efficiencies, aligning your investment process to the advice process and making sure clients get better outcomes. Do you agree? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me -

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