Four ways DFMs can help advisers deliver real value

Financial advisers have a wide range of discretionary fund managers (DFMs) to choose from. As advisers continue to refine their value proposition, increasing compliance and regulatory demands have made it less efficient for many to implement asset allocation decisions on behalf of their clients. A skilled DFM can help address this challenge by supporting advisers with appropriate investment solutions that align with each client’s needs and circumstances.

Four factors can meaningfully differentiate one DFM from another and shape the value advisers deliver to clients:

1. Ownership structure and independence of the DFM

The ownership structure of a DFM whether owned by another corporate entity or independent will make a difference to the outcomes of a client’s financial plan. Many may describe themselves as independent because they do not own an asset manager or an investment platform. However, the truest form of independence is where there is no structural separation where the full benefit realisation ultimately flows to the same end client. In practical terms, this reduces the risk of conflict whether the focus is on investment outcomes or profitability.

2. Ensuring access to skilful asset managers

The construction of portfolios, investment philosophy and process all serve their purpose and require levels of skill. There are DFMs that will talk about identifying skilful asset managers, although struggle to truly quantify what this means resorting to qualitative rationale such as research or it being ‘a bit of an art or science’.

The nature of South Africa’s equity market compared to US markets, is largely inefficient rewarding less skilful asset managers as asset prices always go up after time. Unfortunately, this also allows them to hide behind time.

3. Delivering real investment returns

For an adviser, value creation for the client’s portfolio is crucial in today’s economic environment. The question an adviser should ask is whether the DFM is focused on preserving the client’s value of money. If not, the client will be the poorer for it over time.

The litmus test for advisers and their clients should be:

• Are you actually preserving the purchasing value of my client’s money over time? If you are not doing that, sorry, I shouldn’t hire you as a DFM.
• In addition, for each level of risk are you able to provide a little bit more than CPI plus two, three or more percent?

From our perspective, returns should first and foremost preserve the purchasing value of money over time and above that compensate the client for the level of risk being undertaken within the portfolio by not just generating profits but also long-term value generation. We define a skilful manager by being able to consistently deliver the generation of Alpha, the axis return over a benchmark of 2 to about 3% over a cycle. This is a fundamental factor from a manager research point of view.

Again, we try to sweat as much of the capital that our owners trust us with and try to generate not just profits for them but long term value generation. Should this prove difficult, we will consider a passive offering or portable alpha offering taking the diversification ratio, information ratio and others into account to ensure a smooth return profile where we are solving with a particular client in mind. This can consist of a combination and varying levels of allocation based on the liability pool, the risks or specialised needs such as Shariah compliance.

4. Service differentiation counts

In conclusion, financial advisers should evaluate DFMs on their service differentiation by asking – ‘is this DFM my investment team or merely a service provider providing investment services at a price?’. An investment team develops highly specialised, tailored solutions by bringing the value chain closer or into the adviser’s practice and contribute to business growth. There’s a huge difference between the two.

Disclaimer

The information, opinions and any communication from PPS Investments Group, whether written, oral or implied are expressed in good faith and not intended as investment advice, neither does it constitute an offer or solicitation in any manner. Furthermore, all information provided is of a general nature with no regard to the specific investment objectives, financial situation or particular needs of any person. It is recommended that investors first obtain appropriate legal, tax, investor other professional advice prior to acting upon such information.