Talking Point
Is Consolidation of the DFM Industry on the Cards?
- Leigh Kohler
Over the past 10 years, we have seen prolific growth in both the number of discretionary fund managers (approximately 40-50 DFMs) and assets under management (approximately R40 billion in 2012 and now R450 billion according to Collaborative Exchange). Even though asset growth has been exponential, growth has not been experienced by all DFMs. There have been very few beneficiaries of asset growth – more than 80% of all assets are managed by less than 10 of the incumbents.
A fragmented industry
While DFM propositions have been largely beneficial to advisers and clients, it is important to note that not all DFMs are ‘built’ equally – they have different value propositions available. When comparing DFMs, one may pick up stark differences between DFMs in SA, such as investment performance, investment pedigree, use of technology, experience, team size and service propositions.
The fragmentation in the industry has led to several challenges, including:
- High costs: the cost of doing business in the DFM industry is relatively high due to the need to maintain multiple platforms, IT spend, and operating systems. This can make it difficult for small firms to compete with larger firms.
- Lack of scale: many smaller DFM firms may have limited financial resources to invest in new technologies and services, placing them at a disadvantage relative to larger firms.
- Difficulty in accessing capital: smaller DFM firms that do not have the backing of a large parent company, may experience difficulty in accessing capital, which could in turn limit their ability to grow and expand.
Consolidation…potential arrangements
As a result of these challenges, there is growing potential for consolidation in the DFM industry. This could take many different forms, including:
- Mergers and acquisitions: larger DFM firms could acquire smaller firms to increase their market share and provide enhanced services and benefits to clients.
- Joint ventures: joint ventures could be formed to share resources and costs.
- Alliances: DFM firms could form alliances with each other to offer a wider range of products and services.
We have already seen the formation of alliances in the market and talks of joint ventures and it seems inevitable that M&A activities will start happening in the foreseeable future. This could be beneficial to the industry and lead to better economies of scale, translating into enhanced value for services and the potential for DFMs to have ‘easier’ access to capital and/or backing from their parent company to grow their business offerings.
Other factors to consider
In addition to the above, there are other very important dynamics to consider.
- An increasing regulatory burden: the regulatory environment for DFM firms is becoming increasingly complex and The resources and time required may become challenging for smaller DFM’s.
- Cybersecurity risks: South Africans lose more than R2 billion per year to internet fraud and phishing attacks and we are ranked third on the Cyber Exposure To mitigate cyber- attacks costs money. Smaller DFMs may find it increasingly challenging to cater for the IT spend required to manage their cyber security and lower the associated risks.
- A growing demand for a wider range of DFM services: the demand for DFM services is growing, both domestically and This could create opportunities for consolidation as larger firms should be better positioned to meet this growing demand.
- The increasing technological sophistication of the DFM industry: the pace of change could make it difficult for small firms to keep up with the latest technologies – this technology is not only needed to improve their business (back-end) but also the growing need to deliver on front-end services.
In summary
There are too many players in a relatively small market. With consolidation expected it is important to maintain a balanced approach when assessing the impact/consequences of mergers and acquisitions, alliances or joint ventures. Consolidation may bring about cost savings and increased efficiency, but it also poses the risk of reduced competition and a potential decrease in innovation. Larger DFMs may become complacent and less motivated to develop new solutions or services. This lack of creativity could ultimately harm DFMs and advisers, as well as their clients. In addition, consolidations involve significant financial investment that may not always pay off.
As can be seen, consolidation in the DFM industry has both advantages and disadvantages, and these need to be carefully considered by DFMs and the industry at large.
Key points
- The DFM industry in SA is rather fragmented – creating an opportunity for consolidation as business demands and client needs increase.
- With margins increasingly under pressure, sufficient scale is key to remain relevant.
- There are both benefits and drawbacks to consolidation that must be carefully considered by DFM firms and the industry at large.
Knowledge is Power…
Access more insights from the INN8 Invest team’s quarterly report.
For you, the adviser, click below to download a collection of articles to use in your practice.