The rise of the discretionary fund manager

For the simple reason that the investment outcomes are better.
Image: Shutterstock

There is a worldwide trend towards discretionary fund managers (DFMs), and South Africa is no different.

“The reason for this is there’s a huge amount of legislation and it’s quite onerous on financial advisors trying to stay abreast of all the developments,” says Florbela Yates, head of Equilibrium, which has more than R13 billion assets under management, and was previously known as Momentum Investment Consulting (MIC).

“Our clients are the financial advisors, who understand that their primary role is to give advice and they have limitations when it comes to managing portfolios. We have the necessary Category I and Category II licences needed to make adjustments without having to go to each client to get their permission every time a change is required. We can make adjustments at the click of a button, so it simplifies the management and reporting process for advisors.”

Another reason for the swing to DFMs is the likelihood of achieving better investment outcomes.

Yates explains that the reason for the rebranding from MIC to Equilibrium was to create a more powerful and independent presence in the market, built entirely on discretionary fund management, aimed at achieving a better balance in the financial advisory marketplace.

DFMs offer several benefits, perhaps most important of which is the ability to outsource the day-to-day investment decisions to experts.

Financial advisors seldom have the time to monitor the global universe of investments, from stocks to fixed income, property and alternative investments – all of which are crucial to achieving a balanced and diversified portfolio. Nor do they have the time to research outcome-based investment themes and develop strategies for different client needs.

Increasingly, that task is being outsourced to DFMs like Equilibrium.

“We create efficiencies in the advisor network by providing detailed, yet simplified reporting. This means advisors can focus on what they do best, such as tax, risk profiling, and establishing the needs of clients over the short-, medium- and long term.

“There is research to show that advised clients have three-to-five times better investment outcomes,” says Yates.

Study shows DFMs improve client relationships and investment outcomes

A study conducted by Rathbones in conjunction with CoreData in 2018 in the UK found that more than 70% of advisors saw an uplift in client portfolio performance, while 66% cited improvements in their clients’ risk/return profile after engaging with a DFM.

The same study also found that as client relationships improved, higher fees were generated for advisors.

“An increase in available time for advisors contributed to their capacity to manage a greater average number of clients per head as well as the time that they were able to spend with each client,” says Yates.

More than half the advisors’ clients are reported to have increased their trust in the advisors, with 63% reporting an improvement in the quality of their client contacts.

Many financial advisors partner with a DFM for a variety of reasons, not least of which is the mounting regulatory burden in financial services and the associated costs of this.

“Not only is it taking up more of their time, but it requires different skills to ensure adherence to the legislation. Partnering with a DFM may remove some of the compliance burden, allowing the advisor to focus on determining the needs of clients and the outcomes necessary to enable them to achieve their personal financial goals, while the DFM manages the investments. The partnership gives the advisor, and clients, access to cutting-edge investment research and expertise,” adds Yates.

This does not mean that the advisor is a passive participant in the process, but it does require entering into a partnership with a mandate to execute on an agreed investment strategy.

That partnership involves a collaboration to determine the risk tolerances, investment time horizons and goals, and from this an investment portfolio can then be constructed.

Unlike investing into a unit trust, discretionary fund management is a service, not a product. The DFM determines the required strategic asset allocation, the appropriate investment styles and then selects the funds. The onus for portfolio construction, investment performance and monitoring rests with the DFM. The advisor gets access to full institutional reporting across all portfolios, together with detailed attribution analysis. This professional service helps advisors build credibility with clients.

Bulk switching

Another key advantage of engaging with a DFM is the ability to bulk switch across all investors simultaneously. The DFM is more nimble than an individual advisor and can make portfolio adjustments in seconds. Not only does this ease the advisor’s administrative burden and free up their time, it also allows all clients to be treated fairly by ensuring that any decisions with regard to asset allocation or fund changes are implemented across all client portfolios on the same day.


While DFMs charge an additional fee for their service, this is often negated to some extent through the preferential pricing that the DFM negotiates with underlying asset managers, based on their substantial assets. Equilibrium believes in charging clients in the same portfolios the same fee, regardless of their individual asset size.

Softer advantages

There are also some softer advantages in engaging with a DFM. “Once they are invested with us, advisors find it easier to remain invested with us. We can help them grow their book, or exit the industry if that is what they want, or provide a unique investment solution for a group of advisors,” says Yates.

For more information, contact Equilibrium.

Follow Equilibrium on LinkedIn.

Brought to you by Equilibrium. Enabling your advice outcomes.

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