In a nutshell, a discretionary fund manager (DFM) is an established asset manager with the license and mandate to buy and sell investments on behalf of clients. What this means in practice is that a DFM becomes the investment arm of an adviser’s business, taking on the role of constructing and managing a range of investment solutions on behalf of the adviser’s clients, thus freeing up their time to focus on client relationship management, financial coaching, reviews and other critical financial planning services.
Why is this important? Investment markets have become increasingly complex over time with an increase in geopolitical risks, evermore cumbersome legislative requirements, and new sources of alpha being found through the growth of alternative asset classes. Further, navigating financial planning for the future is multi-dimensional, and the use of technology to model the impact of these factors is becoming vital for the adviser.
The local DFM market has grown significantly over the last few years, simplifying the advice process for financial advisers by helping theme construct investment solutions and streamline their reporting requirements. However, we believe that the local DFM market is not currently positioned to navigate today’s vast, sophisticated and volatile global investment landscape. In addition, the global shift from defined-benefit to defined-contribution retirement schemes means that the investment, as well as the behavioural and longevity risk associated with long-term investing, has been transferred almost entirely to the individual. These trends create gaps in the local DFM market, requiring a step change in the domestic advice industry.
This changing landscape and complexity highlight the need to partner with a DFM that has full global reach to provide domestic investors with international diversification unmatched in the local market. Further, partnering with a DFM that understands that successful retirement outcomes require holistic planning, and that the role of the adviser is evolving with more of the functions becoming technology driven, is key.
What would be the measure of a successful DFM? A valuable DFM is one that is designed to complement local advisers’ expertise with access to world-class investment management and technological capabilities that remove complexity and help clients achieve their financial goals. Single-asset managers typically select investment instruments from within a unit trust fund. By contrast, a DFM, also known as a retail multi-manager, selects from many managers’ funds to construct solutions. The portfolio construction capability is fully outsourced to the DFM which has the necessary licensing to bulk trade and actively manage the solutions. The DFM also has the skill to conduct manager research, which informs portfolio construction capability. As such, it is important that a DFM has research teams capable of constructing optimally diversified investment portfolios accessing the full global investment universe of unit trusts, ETFs and other active and passive asset and investment classes.
Ultimately, the continued growth in the size and complexity of the global investment universe, alongside the enhanced access that South African investors have to this universe, has increased the relevance of DFMs in recent years. The scale of global markets suggests that for any local business to keep fully abreast of the fund and asset choices available abroad would be a daunting, if not impossible, task. In addition, as the regulatory environment becomes more complex and compliance more onerous, DFMs will be required to become more sophisticated in their ability to advise and manage this complexity on behalf of the financial advisers that they serve.
That said, in South Africa, DFMs do not provide the personal services offered by a financial adviser. Financial advisers maintain and grow the relationships with their clients. Among financial advisers’ top priorities is being able to spend time with clients, build and maintain relationships while providing advice. By outsourcing the compliance and investment management function to a DFM, the adviser can focus on growing their practice.