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Investment

DFM considerations for retail and institutional advisers

Craig Abbott, co-head of institutional discretionary fund management, RisCura

Discretionary fund management (DFM) is gaining popularity as this service allows financial advisers to outsource their investment decision making process to a professional third party, on behalf of their clients.  

The first independent DFM survey conducted by The Collaborative Exchange in 2019, evidenced some valuable findings regarding the DFM environment in the South African retail space. Although not all the big market participants were present in the survey, it did provide insight into the weaker aspects of the DFM offering, namely pricing, independence, and transparency.

Two years on and these issues are still around. As an adviser selecting a DFM, it’s important to be aware of these problems and how they may affect your business.

The majority of the costs that an independent DFM passes on can range anywhere from 10bps – 35bps. Many of the independent DFMs work on a sliding scale as a percentage of assets under management. The more assets, the smaller the fee and vice versa, but the cost savings through outsourcing aren’t always carried through to reduce an adviser’s fees.

The next crucial, but equally important point, is the transparency and independence of the DFM.  How many will select their own underlying funds within their own solution? If so, is it communicated to the advisers? If that fund is not performing relative to its benchmark, will the DFM change or fire the manager? Does this not constitute a conflict?

In the interests of assisting and guiding advisers and their clients, below are a few points to consider when selecting the right independent DFM:

  • Pricing models for advisers based on the size of the adviser’s assets under advice.
  • Assets under management – indicating where the assets are currently residing.
  • Longevity of the business and background of all directors.
  • Have they any legal affiliation to any asset manager or distribution channel?
  • Investment philosophy and process.
  • Corporate governance.
  • What is the service delivery to the advisers – report backs, quarterly meetings, etc.

Alongside the points above, as an adviser, it’s crucial that you, and only you, will always be the relationship holder with your client. A DFM service, should be viewed as a specialised investment service that is outsourced to provide your clients with the best possible outcome relative to their appetite for risk.

One needs to partner with a DFM and go on a journey where the trust and professionalism can be built up over time and costed according to the desired set outcomes you wish to see, but not at the expense of the end client. A thorough due diligence on the DFM is required and it’s important to understand if you’re getting value for money that will in turn transform your business into a professional operation.

As an adviser with institutional clients, a multi-manager solution can address all issues and concerns. Once again, it’s outsourced decision making. Considerations should be given to costing, investment management style and process, and how actively the fund is managed via strategic asset allocation and tactical asset allocation. Selecting a single manager in a balanced fund can be problematic – but if you outsource it, you protect yourself and your clients too.







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