Are Discretionary Fund Managers Adding Value for Investors?

Over the past decade or two the investment industry has become more layered and complex. A significant development, which has occurred under the radar of most lay investors, has been the rise of the discretionary fund manager, or DFM.

In this article we explore what DFMs are, their relevance to investors, and where financial planners stand on making use of them.

What is a DFM?

In essence, a DFM partially or fully takes on the investment function of a financial planner or adviser. DFMs have a Category 2 licence under the Financial Advisory and Intermediary Services Act, which allows them to change the underlying investments in a portfolio at their discretion, without requiring the investor’s consent. 

DFM services range from providing advisory firms with proprietary investment research to managing clients’ portfolios on investment platforms, to offering a range of in-house portfolios that cater for different investor profiles. A DFM’s blended portfolios, known as “model portfolios”, typically comprise a blend of actively and passively managed unit trust and exchange traded funds, but may also include hedge funds, private equity, and infrastructure projects in select instances.

A DFM adds an extra step to the investment process. In the past, your financial adviser would assess your investment needs and then channel your money into a combination of appropriate collective investment schemes, typically via an investment platform. Under the DFM arrangement, after assessing your requirements, the adviser will, with your permission, select a DFM strategy that will best deliver on those requirements.

Note that not all your investments might be managed by a single DFM. An adviser may use a few different DFMs, or might recommend DFMs for some investments and not for others, or give you the option to invest directly if you wish.

Apart from a few smaller operators specialising in DFM services, the country’s large financial institutions now all have DFM divisions. While DFMs have traditionally operated through adviser networks, some are now offering their portfolios directly to the public via their own online platforms. 

DFMs are estimated to manage assets of between R450 billion and R600 billion, according to a 2023 survey by The Collaborative Exchange. Another survey, by NMG Consulting, showed that a majority (57% to 67%) of independent advisers use DFMs, with this percentage expected to increase in coming years. 

What are the pros and cons?

DFMs’ expertise lies in blending fund managers with differing investment strategies to provide optimal performance while reducing risk through manager diversification. This is similar to how funds of funds and multi-manager retail funds operate.

Quoted in a 2025 article for IOL, Craig Torr, director of Crue Invest, likened a DFM to a rugby coach picking players with different skills, who combine to form a well-balanced team: “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 having 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 try to avoid.”  

DFMs also remove from advisers the burden of administrating clients’ portfolios, which has become more onerous in recent years as regulatory and due-diligence requirements have increased. This frees up time for advisers to spend with clients and attend to other aspects of their finances.

The downside of the DFM movement is that it adds another layer of asset management for investors, which means an added layer of investment costs. However, through economies of scale, DFMs have been able to negotiate lower fees with investment houses, resulting in similar, or even slightly lower overall fees compared with investing directly in a retail fund. 

What do advisers think?

Honest Money approached several independent financial planning practices to assess what South Africa’s cream-of-the-crop planners, those with the Certified Financial Planner (CFP) accreditation, thought of DFMs.

Of the six firms who responded, five were fully converted to the DFM model, one had some reservations about using DFMs, and one practice said they did not use DFMs at all – they were concerned about the extra layer of costs and preferred to be fully in control of their clients’ investments.

The planners using DFMs cited the positives outlined above, pointing out that the input of investment expertise and the management of risk through manager diversification led to better, more consistent client outcomes. While there was an extra layer of costs, the overall cost to the investor was not greater than investing directly.

Rudolph Geldenhuys, CFP, 2024 Financial Planner of the Year and director of Firecrest, said the DFM firms he works with are extremely approachable in accommodating the requirements of advisers and their clients.

Warren Ingram, CFP and co-founder of Galileo Capital, said DFMs were especially useful for offshore investing. They had managed to negotiate exclusive arrangements with overseas funds that would not have ventured into the South African market otherwise.

“The number of offshore funds – over 100 000 worldwide – is too vast for advisory firms to access, and DFMs have research and high-level quality-control capabilities that advisory firms don’t have. Even big local managers of balanced funds, now that offshore allocations have increased, are unlikely to have the necessary offshore expertise. So it’s hard to argue that DFMs aren’t good in the offshore space,” Ingram said.

However, he said that if, as expected, technological advances brought pricing down and boosted capabilities to smaller players, DFMs could be squeezed out if they pushed up net costs for the client.

References:

DFMs – What are they and how do they benefit you? (IOL)

Using DFMs – A financial planner’s perspective (IOL)

What is a discretionary fund manager? (Smart About Money)

What is a DFM, actually? (Blue Chip magazine – FPI)