The rise of the Discretionary Fund Manager

Roland Gräbe, Head of Tailored Fund Portfolios at Old Mutual Wealth Assurance.

Over the past decade, the idea of turning to external experts for investment proficiency has gained exponential popularity internationally. The 2016 Outsourced Chief Investment Officer Buyer’s Guide reported that outsourced Chief Investment Officer (CIO) assets reportedly grew almost tenfold (860%) over the eight years from 2007 to 2015, which implies an annual growth rate of about 30%.

While the survey also reported growth of the international market share of outsourced financial expertise, the growth trajectory is now stabilising after its rapid initial adoption; in South Africa, the use of discretionary fund management (DFM) businesses as investment partners is still growing very fast, and there remains a huge opportunity for growth amongst independent financial advisers (IFAs) going forward.

Roland Gräbe, Head of Tailored Fund Portfolios at Old Mutual Wealth, says that in the South African market, he predicts that most of the smaller IFA practices will eventually partner with DFMs, or end up in consolidation with larger groups, as a result of an increasingly complex market and challenging regulatory environment.

“It requires significant scale for any advisory practice to run their own investment process in line with the ever-tightening industry regulations – something that the average South African advisory practice simply cannot afford to do. We therefore expect to see a similar trend to that observed overseas, especially considering South Africa’s imminent implementation of the Retail Distribution Review (RDR), which closely resembles the RDR model implemented in the United Kingdom in 2013.”

The decision to partner with a DFM brings a fundamental shift in the value proposition, scalability and quality of an IFA practice, explains Gräbe. “Until recently, most advisers regarded investment implementation and management as part of their service to clients. Advisers spread client investments across different unit trusts, so that each client would not be unduly exposed to poor performance in a particular fund. Unfortunately, the information available to advisers is fairly limited, so these decisions were mostly based on past performance.

“Over the last decade, regulatory scrutiny on how client investments are constructed has increased drastically, and the demand on advisers to properly research and justify these decisions has necessitated a different approach. In order to effectively implement and manage a client’s savings, the adviser now requires skills and resources in portfolio construction, asset allocation and manager selection.”

Gräbe says that a very cost-effective way in securing the necessary expertise in order to meet clients’ objectives in an efficient and optimised way, is to partner with a DFM that has a solid track record in providing expert investment support, as well as insights into how it can best be applied to the adviser’s unique client base.

“A second and also critical part of the adviser’s partnership with a DFM is that the adviser may benefit from the scale of the DFM’s own investment business, which can potentially aid in reducing asset manager costs through scale. Where the DFM has a powerful brand, the partnership further strengthens the brand of the adviser in the eyes of the client, by building trust and giving comfort that the money is managed by an organisation with a solid reputation.”

Furthermore, he adds that by providing training and knowledge to IFAs through their regular interaction, DFMs enable the adviser to better communicate with clients on issues such as market trends, economic outlook and regulatory compliance.

This means that the key focus of the practice can be providing advice, rather than investment implementation and management, Gräbe concludes. “All of these aspects enhance the value of the advice practice and make it more attractive to new clients, enabling the IFA to scale up his or her own practice. The DFM can also ensure that the adviser spends less time on investment and operational matters, so that they are able to focus on what they do best – provide advice.”