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How to Choose a Discretionary Fund Manager in 4 Simple Steps​

The discretionary investment industry has seen rapid growth over the last few years, and it’s time that wealth managers choose a DFM that adds value to their business.

3 min read

The Discretionary Fund Manager (DFM) industry has seen rapid growth over the last few years, both in terms of assets under advisory and number of DFMs in the market.

DFMs are independent investment experts proficient in making investment decisions on behalf of financial advisers who mandate them to act for clients.

The reason for their recent rise is twofold: the first is the impending Retail Distribution Review (RDR) legislation that is set to place greater onus on advisers to make more informed investment decisions and; secondly, the value they add to a financial advisers’ practises and their investment processes.

So what has changed?

In the last five years or so, independent financial advisers have had to have a good look at what their core business is and if it is 1) connecting with clients, 2) educating them, and 3) helping them make the best financial decisions for both now and the future. By partnering with a DFM, this has allowed advisers to spend more time on this core competence, enhancing clients’ experiences in return.

By my estimation, there are close to 40 DFM firms operating in the SA market right now, ranging from new entrants over the past two years, to players who have been around for five years or more and have established client bases and AUM north of R10 billion.

On the face of it, the core offering of DFMs seem very similar: They take on the portfolio management selection responsibility and the buying and selling decisions so that the financial adviser can focus on what they do best – advising and servicing their clients.

But it’s not that simple.

Each DFM has a distinct value proposition

Some DFMs have specific client portals with tools and reports that advisers can use. Others have value-added services like adviser support and facilitating enhancements tailor-made to the adviser’s business model. A DFM’s investment style and the way they view risk also differ, as well as the investment vehicles they use – model portfolios or fund of funds, or both.

As the industry grows, it becomes increasingly difficult for an adviser to choose the right DFM. Given the partnership and business fit between adviser and DFM is critical in enhancing the client’s experience, the selection process requires careful consideration.

Here are some ideas an adviser might want to consider before choosing a DFM:

Step 1 – Articulate why you want a DFM

Make sure you know exactly why you want to utilise a DFM and put this down on paper. This will force you to think about the “why” properly.

Step 2 – Filtering Process

List your criteria that best suits your business needs. Creating a Due Diligence Document that can be sent out to DFMs will help you find your perfect partner.

The key areas an adviser should cover are:

  • Ownership structure – independent or corporate
  • Size of the DFM – AUA and number of clients
  • Investment process – particularly in the way they view risk
  • Make up and experience of the team – both investment and servicing teams
  • Investment proposition – do they run models portfolios or fund of funds
  • Performance – what is their track record
  • Client value proposition – what services do the DFMs offer to their clients
  • Charging structures – what and how do the DFMs charge fees

Step 3 – Meet the short-list

Once you have a good sense of the short-list (no more than three or four DFMs), set up meetings between each firm and your team – preferably at their offices. In this meeting you can get some clarity on the due diligence questions you asked, and get a sense and feel of the team. In my view, the cultural and business fit is one of the most important aspects of a successful partnership.

Step 4 – Review and decide

Once you have met the short-list of candidates and have gone through the due diligence documents, it is always a good idea to go back to Step 1 and evaluate which DFMs meet the requirements you originally set out. This list, as well as your impressions of the various businesses, will put you in a very good position to make your choice of preferred DFM partner.

At INN8, we believe that DFMs are here to stay because of the value that they can add to any financial advisers’ business in an age of greater investment and regulatory complexity. We are DFM agnostic and our aim is to become the leading platform that enables and connects DFMs and Wealth Managers to achieve their clients’ financial goals.

Written by

Stephen Backhouse

Stephen Backhouse

A strategic relationship specialist with over 13 years’ experience in the asset management and platform industry, Stephen is responsible for Strategic Relationships at INN8. He holds a deep knowledge of investment products and a sound grasp of local and international markets and trends.