Words on wealth: Using DFMs: a financial planner’s perspective

Last week, the writer introduced us to the world of discretionary fund managers, DFMs. File photo.

Last week, the writer introduced us to the world of discretionary fund managers, DFMs. File photo.

Published Jun 23, 2024


Last week I introduced you to the world of discretionary fund managers, known throughout the financial services industry simply as DFMs (“DFMs: what are they and how do they benefit you?”, Personal Finance, June 15). DFMs service independent financial advisers by managing their clients’ investment portfolios.

I was initially a little sceptical of this breed of asset managers, who I believed further complicated an already complex investment landscape and added an extra layer of costs for the consumer. But two interviews – the first with John Anderson from Alexforbes, covered last week, and a second with Craig Torr from Crue Invest – convinced me that DFMs, or the best ones at least, provide a win-win for advisers and their clients.

What’s best for clients?

Last year, Crue Invest in Pinelands, Cape Town, won the Financial Planning Institute’s Professional Practice of the Year award. It is a fiercely independent fee-based practice that has enjoyed substantial growth since its inception 20 years ago.

Torr says his practice makes use of two DFMs, and his clients are reaping the benefits. “The more we've been doing this, the more convinced we are that it is the best and only way to proceed. Financial planning and investing are very different skills, and you need different businesses to perform the two functions – if you look at the complexity behind managing a client's money from an asset allocation and rebalancing perspective. So we made the decision to focus on our clients and partner with DFMs who would manage the money.”

Torr says there is no obligation on clients to invest through a DFM – they can select their own choice of balanced fund, for example. But the reason a client seeks advice is to ensure an optimal investment outcome.

“Clients are coming to you for advice, and we tell them this is the best way we know how to manage their money. Using a DFM reduces the volatility – there's evidence of that over the track record of both DFMs we’ve been using – and improves the end result net of costs. If you are going to pick your own fund, part of the reason for you using us is almost not there.” Torr says individual funds tend to go through periods of good performance and poor performance. “What do you do when you're in that underperforming period? How will the client respond?”.

Blended strategy

DFMs have been called “retail multi-managers”. Their speciality is to blend the funds of different asset managers in a portfolio.

Torr likens a DFM to a rugby coach picking players with different skills who, combined, will form a well-balanced team. He says: “In this approach, the DFM chooses managers that complement each other to reduce the volatility, managers with different views or investment styles, so you don't end up where you have long periods of underperformance. Investors start doubting themselves during those periods and start switching in and out of funds. And that is exactly what we are trying to avoid.

“Each month we compare the big 10 balanced funds with how the DFMs do. Over time you see the consistency, the lower volatility, when you're using a DFM. At the end of the day you get a better result, because you are compounding those small gains year after year.”

It’s not only active managers in the blend – lower-cost index-tracking funds are included where appropriate, especially in the offshore space, where you may battle to find managers who beat investment benchmarks, Torr says.

Investment costs

Torr says the investment costs of using a DFM are no higher than those of a retail fund. “The two DFMs we use have total expense ratios (TERs) that are lower than the typical balanced fund, because they have institutional buying power with the underlying managers, and they pass that discount on. Normally a balanced fund's TER is 1.2% to 1.5%, and a DFM investment management fee comes all in at about 1.2% or 1.3%, depending on how aggressive the strategy is. So the client is paying no more than if they went and picked their own balanced fund.”

Administration and compliance

One of the biggest advantages for advisers is that the DFM handles the time-consuming administration of a portfolio, which includes complying with the various laws governing investments, and rebalancing investments when they fall outside regulated limits.

Torr says: “We don't have to consider what to do in terms of rebalancing when there has been massive market movement or currency weakening or strengthening, just to keep those portfolios in sync. I don't know how practices that aren't outsourcing to a DFM manage to rebalance, because it is a very time consuming process.”

The relationship between the DFM, planner and client is completely open, Torr says. “We can place as little or as much business with them as we like, and we wouldn't have it any other way, being an independent practice.”

The agreement is essentially between the client and the DFM. “In the fee agreement the investment management fee, which includes the DFM fee, is disclosed and our planning fee is disclosed, and it gives the client’s investment platform the consent to deduct those fees from the client's investment,” Torr says.