31 May 2021
DISCRETIONARY FUND MANAGERS FEATURE
Not all DFMs are the same BY ROLAND GRÄBE Head: Discretionary Fund Managment, Old Mutual Wealth
“Sadly, the temptation for a DFM to unduly influence a financial adviser is not new”
W
ith so many Discretionary Fund Managers (DFMs) to choose from in South Africa, financial advisers are truly spoilt for choice. But how important is the choice of a DFM, and is there any differentiation in approaches between these DFMs? It can be argued that over the last 15 years or so, a number of business models and approaches have evolved, giving rise to a very differentiated set of options available. Manager research Among the large DFMs, we see specialisation in service placed on different focus areas. Asset manager research is a critical component for any DFM, but the way manager selection can be leveraged differs between DFMs. Different approaches include offering a fund rating system with open choice, offering a selected ‘buy list’ of recommended managers, or even accessing a specific group of selected managers at a competitive management fee. If the institutional market is anything to go by, selling manager research as a commodity is quite a difficult undertaking in South Africa, where the group of popular and respected asset managers is largely known and limited. So, for a DFM to elevate manager research to a competitive advantage, there is certainly limited scope in the local market, with more potential for developing a unique proposition in the global asset management space. Valueadd through manager selection is often also difficult to quantify, especially where the focus of many clients is simply to grow their wealth in real terms over time.
and this affects DFMs across the board – both independent and those working closely with large financial services firms. Here, the question about independence is between DFMs and financial advisers. Sadly, the temptation for a DFM to unduly influence a financial adviser is not new. We have observed many different business models that are developing both globally and locally, that lead to the creation of a conflict of interest between financial advisers and DFMs. This can take different forms, and we highlight a few of the most prevalent examples. A fairly direct approach, used in South Africa by a minority of DFMs, is to directly share some of the DFM fees they charge with financial advisers. This approach creates a financial incentive for advisers to use a particular DFM and may pose substantial risks to especially independent financial advisers. Another approach with the same net result, is for a DFM to purchase a stake in an IFA practice in return for support of its services. These approaches are controversial. Thankfully there are a large number of DFMs that are willing to compete purely on their offering and service, offering no financial incentive to supporters of their proposition.
Pricing In any market, and the DFM industry is no exception, there is usually a large choice when it comes to pricing. DFM fees differ significantly, with standard DFM fees on local portfolios running from as low as 0.1% per annum to well over 0.5% per annum, in some cases for very similar services. But in this market, pricing has a secondary dimension – since DFMs develop model portfolio and fund of fund solutions, there is also significant differentiation in the solutions developed when it comes to pricing. A large driver of this is the DFM views on two fairly controversial topics: passive or
“DFMS are now also differentiated in the way they design investment solutions for clients” 16 www.moneymarketing.co.za
index investing, and performance fees. To illustrate the difference in approach, a cost-conscious DFM can build a high equity balanced fund model portfolio solution with a Total Investment Cost (TIC) of 1%, inclusive of a DFM fee of 0.1%. On the other end of the spectrum, there could be a DFM that charges a fee of 0.5%, offering a portfolio with a combined TIC of as high as 2.5%. The higher TIC might be due to performance fees or even inclusion of more expensive asset classes, such as hedge funds. The bottom line is the range of DFM solutions differ greatly when it comes to pricing, and in investments, ‘more expensive’ does not always translate to ‘better performing’. Independence A lot has been made of the corporate positioning of DFMs relative to asset managers and unit trust LISPs. Those DFMs that are not connected to the asset management and unit trust providers they select, consider themselves as independent. There is, however, another aspect to consider,
