Points to ponder in selecting a DFM

DANIEL SCHOEMAN CFA, CIO, Portfolio Analytics

At Portfolio Analytics, we believe that discretionary fund managers (DFMs) should be able to add demonstrable value to any financial adviser’s business in an age of ever-increasing investment and regulatory complexity. However, not all advisers need a discretionary fund manager (DFM). If your advisory practice ticks the following boxes, then you wouldn’t need a DFM:

• You already have a FAIS Category II licence and have been managing your own model portfolios on different LISP platforms for several years.

• You are satisfied that your investment process is disciplined and robust:

- Access to timely economic research to inform strategic and tactical asset allocation decisions

- Fund manager research is informed by both qualitative and quantitative characteristics

- Portfolio construction incorporates the latest methodologies and ensures optimal blending of uncorrelated fund managers

- Regular reviews take place to evaluate portfolio performance relative to the initial portfolio design objectives

- Access to world-class decision-support systems such as Bloomberg, FactSet and Morningstar Direct.

• You are comfortable with your operational process:

- Portfolios are FAIS compliant

- Dedicated team of operational staff who works closely with the LISP platforms

- Trades and switches are performed accurately and efficiently

- Monthly fund fact sheets are produced in a timely manner.

• You have enough time to focus on creating and building client relationships, understanding clients’ needs and sourcing the most appropriate solutions.

• You have access to cost-effective institutional investor products.

• You provide different investment options to different tiers of clients.

• You follow an optimal practice management process.

If, however, your advisory practice does not tick most of the above-mentioned boxes, consider this when selecting a DFM:

• Ownership structure: Corporate or independent? Is the culture of the DFM compatible with that of your advisory practice and could you form a good relationship with the firm and the team supporting your clients’ specific requirements?

• Size of the DFM: Assets under management (minimum of R10bn) and track record of at least 10-15 years through different market cycles? Optimal number of clients to provide a continued bespoke service offering?

• Investment process: What is the portfolio construction philosophy of the DFM and are they able to utilise different investment instruments, styles and strategies?

• Investment and Operational Team: Size, experience, qualifications, quality and accessibility of investment and operational staff members?

• Performance of portfolios: Consistency of longerterm returns relative to appropriate benchmarks?

• Fee structures of DFM and underlying funds in portfolios: Does the DFM proposition promise value for money in terms of the level of service you will receive on an ongoing basis?

• Value-added services offered: Any other valueadded services you may expect from the DFM, i.e. support services in investment simulations, servicing clients and practice management?

These considerations should aid advisers in making the decision on which DFM would provide the best partnership and business fit with their practice.

For more information call us on 011-463 9600 or email dfm@analytics.co.za