Know Your Money with Bronwyn Waner and Craig Finch
Know Your Money with Bronwyn Waner and Craig Finch
112. Discretionary Fund Managers explained
Unlock the secrets of Discretionary Fund Management with our special guest, Ian Jones, CEO of Fundhouse. Join us as we uncover the pivotal role DFMs play in shaping personalized investment portfolios in collaboration with independent financial advisors. Discover how DFMs leverage their industry expertise to negotiate lower fees, providing cost-effective solutions and safeguarding against scams. We highlight the symbiotic relationship between financial advisors and DFMs, illustrating how they together create a robust framework for comprehensive financial planning and investment management.
Dive into the debate of solo investing versus professional fund management as we examine the allure of the S&P 500's past performance. Ian cautions against solely relying on historical data and advocates for diversification, including a peek into emerging markets. We discuss the influence of marketing on investment choices and how professional guidance is crucial in this intricate landscape. As the episode unfolds, you'll gain insights into how DFMs not only manage investments with precision but also integrate broader financial planning elements like tax efficiency and estate planning, ensuring a holistic approach to wealth management. Don't miss out on this enlightening discussion that promises to clarify the complexities of fund management and its benefits for your financial future.
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Hello everybody, welcome to Know your Money. I'm Bronwyn Wehner.
Speaker 2:And I'm Craig Finch, and we are from Growth Financial Planning. We hope you enjoy our podcast you enjoy our podcast, Hi viewers.
Speaker 1:today we have Ian Jones from Fundhouse and he is going to explain what a DFM is to us. Ian, do you want to let us know a little bit about who you are and then what a DFM actually is?
Speaker 3:Thanks, bronwyn. My name is Ian Jones. I'm the CEO of a business called Fundhouse. We are a discretionary fund manager, also known in some circles as a discretionary investment manager, and others know it as a model portfolio provider. But basically we work closely with independent financial advisors to carry out research on various investment options and funds in the world and then put those together into portfolios so that the financial advisor is able to invest their clients into portfolios that are managed on an ongoing basis. Each of the portfolios are built with a specific return objective or a risk return profile in mind, so they're built specifically for individual circumstances. But the role of the DFM is to build those portfolios and then make sure they deliver on those objectives over time.
Speaker 1:Warren, any questions?
Speaker 4:Yes, Okay, so lots of banks and other platforms offer similar self-investing opportunities for people. Why is it better to go with the DFM?
Speaker 3:I think there are two parts to that. The first is that, going onto a self-investment platform and the likes, you miss out the quite key step of a financial advisor, and financial advisors add significant value across broad areas of a financial advisor. And, um, you know, financial advisors add significant value across broad areas of a person's I suppose financial life plan. The first is just to actually come up with a plan. The second is through estate planning, through making sure walls and trusts and the like are in place. So by going direct, you generally miss out on on that advice step, um. But then the second part is the both from a cost perspective but also from a professionalization of the portfolio.
Speaker 3:There are significant benefits, in our view, of going into a portfolio built by DFM. Perhaps just to focus on one, the one would be that a DFM generally makes use of underlying unit trusts or other funds that are managed by a professional asset manager and when you invest in one of those funds, you are effectively bringing in the services of a large team with significant levels of experience in the markets that manage things through a cycle. When you're doing that self-service, you're obviously skipping out on that expertise, yes, yes, and in our opinion, the fee paid for. That is significantly. You know you get paid back significantly more than the fee you pay. So yeah, we think long-term is a better after-fees outcome for clients going firstly through an advisor where you get all that planning and fiduciary assistance, but then secondly just the after-return and after-fee outcome. I mean after-fee return is you know. I view better long-term through professional fund management.
Speaker 1:I think also often people will say why should I pay that additional fee to the discretionary fund manager? Like, what are they doing for you? Is that not your role as the financial planner? Like, aren't you supposed to be doing that? And I remember your one presentation you did and you had worked out that you had spent 6,000, I think it was hours talking to the fund managers of those things. Maybe you can just give a little bit of more insight into that as to why a financial planner yes, they do do that role and they can help you but why the DFM is that extra day and takes it further.
Speaker 3:Yeah, I think it talks to why DFMs came into being in the first place is that, as South Africa opened up to global investing and, as you added, I suppose, the tens of thousands of fund options around the world into your universe, it became very difficult for a financial advisor, whose key role is to manage the client relationship and manage their financial affairs and their fiduciary side of things, to spend their time identifying and holding accountable these thousands of global funds.
Speaker 3:So DFMs, or research houses, were brought in because that's our day-to-day job, that's our passion, that's what we spend. All our time doing is to go out into the world, both in South Africa and globally, and identify good investment options that are going to deliver on an outcome to avoid. And this is a really key point. It's not only about identifying good fund managers, but avoiding the scams, avoiding funds and investment options where and there are a lot of them out there where you can lose significant amount of money. So by having a DFM who covers that ground and identifies good, solid options for investment, it is something that, for a financial planning business, is an exceptionally difficult thing to allocate the time to do. And then what has happened over time, as scale has come into our business. We've been able to reduce the fees on the asset management side, which then in turn sort of pays for our fees. So the end client is getting that level of expertise on top of the financial planning advice at quite close to no extra cost.
Speaker 4:So would you say that that is unique over your competition?
Speaker 3:We've got a number of different types of competitors in the market. We aren't the only one who has that scale and gets those benefits. There's, I would say, there are four or five, maybe a couple more in the market that also have scale, but there are another. By last count, there are another 50 smaller DFMs who, perhaps by lack of scale, wouldn't be able to do that, right, okay?
Speaker 1:I just wanted to explain that point that you were saying there a little bit deeper. So you are basically saying that the cost of investing in Alan Gray Balanced is X amount if you go directly to Alan Gray Balanced but because of your scale, the fee that the advisors that use your DFM, that fee wouldn't be the same as if you went to Alan Gray Balanced. So then your fee fits into that. So if it was 1.5%, if you went direct, the fee that Fundhouse is able to get is, let's say, 1.3% and if you add your DFM fee on you're basically paying the same or less. Is that the?
Speaker 1:right explanation, that's an example.
Speaker 3:Yeah, that's an example. The fee discounts that we get differ very significantly depending on the underlying fund manager, on the risk profile of the fund, et cetera, et cetera, but the concept of what you've explained is correct. Yeah.
Speaker 1:Yeah, so the clients aren't necessarily paying more. They're actually paying probably less with standard VAS.
Speaker 2:Yeah, in time, that is what will come to the table, and I think also, ian, over the years we brought funds to you who said, oh, you go to a presentation. And they go oh, this new fund has launched and it sounds so good. And you listen to the expert and you go, wow, that's brilliant, oh, I should invest in that fund. Phone up, ian, ian, we've got to go there. And wow, that's brilliant, I should invest in that fund. Phone up, ian, ian, we've got to go there. And he goes no, no, no, we're not going there yet. What do you mean? You're not going there yet?
Speaker 2:Look at the return. One of the funds hadn't gone through any bad cycle, it was just an upside of the market. They were just going on the back of an upside market and a brand new fund, so it looked good. He said not touch them and still go through a cycle. And that's great advice, because those funds could hit a real problem later on. And if we just jump in with what people tell you at a dinner or a presentation, it looks good, it's often not good later on.
Speaker 4:It's invaluable that so regularly I'll see stuff content online saying that, oh, you're better off as a solo investor and just investing in an index fund like an S&P 500 and just riding the wave. What would you say to people who believe that, and why would it be more beneficial for you to be their fund manager?
Speaker 3:Yeah, so they would have been right the last 10 years. Right To have invested in the S&P 500 index over the last 10 years, you would have outperformed 95, if not more, percent of asset managers out there and we're looking since the financial crash in 2008, after the aftermath of that, and there are a lot of people out there who say, well, I should just invest in the S&P 500.
Speaker 3:I suppose the response I would give is that if we were sitting here 10, 12 years ago and looking backward, the previous 10 years, the S&P 500 was, I think, the second or third worst performing index in the world, and China was actually the top performing market in terms of returns. And so, using point in time to make long-term investment decisions, you've got to be very, very careful. The past very rarely repeats itself, and we've had, and I could be wrong. The S&P 500 might perform very well the next 10 years. You just what we say is you've got sort of the balance of probabilities against you, where the sort of the price that you're paying for the S&P 500 now is close to sort of three times what you're paying, for example, certain other emerging market indices.
Speaker 4:And it's fun to play Captain Hindsight, isn't it oh?
Speaker 1:look at the last 10 years.
Speaker 4:It's very easy to do that.
Speaker 3:Yeah, and look, there's a saying going around at the moment called US exceptionalism. Okay, and as a general rule, us businesses are run with a shareholder in mind, which isn't the same in all other jurisdictions around the world. So if I could buy just US businesses at reasonable prices, that would make a lot of sense. The challenge is not about the quality of the US businesses or the large tech businesses. It's the price you're paying for them. So the share price is the priority. Yeah, it's the starting point. Generally, if you buy something cheaper, chances of making a return over time are higher. But the way we look at portfolios is not to be absolute in them and think you're gonna be right. It's to basically blend different ideas together so that over the long term, you aren't a one-sided outcome.
Speaker 4:You're putting all your eggs into that one index basket.
Speaker 2:But also in the models that Ian looks after with your fund house. There are passives in those models, so these are placed. So maybe one day there'll be only passives. But it's not for us to make that call, it's for Ian and his team to make the call. So we're not against passives or for passives at all, so the blending approaches work really really well over time.
Speaker 4:Now, I was just looking forward to asking him to see what he's supposed to be.
Speaker 2:I've seen so many of those videos.
Speaker 4:It should have just been. Even the guy from the Wolf of Wall Street said it, you know.
Speaker 1:But you know what? But again, it's hindsight. He didn't make that prediction 10 years ago and also to your point, 10 years before that the S&P was the worst. Would you really pick the worst stock at that point? The person that was 10 years.
Speaker 3:Yeah, and, as I say with hindsight, sort of you know, that would have been great. I mean, we operate in an industry that's inundated with marketing. That is so abundantly clear to me. If you go watch, whether it's a football game or a rugby game on the weekend and at halftime, basically you'll be sold two things financial services and booze. And we are sold to and advisors are sold to, and whether it's a good, bad or ugly fund manager, their way of getting flows or investments into their funds is to go and market, is to go and sell what they do. And so to discern a good proposition that's been marketed to you versus a poor is not always easy, and often some of the worst solutions out there are the glossiest.
Speaker 1:Yeah.
Speaker 3:So what DFM tries to do is to try and wade through that and come out the other side with, you know, a clear head, a bit of a clear head, and yeah, we won't always get it right, but at least you've got someone who dedicates the day-to-day existence to trying to do that, as opposed to a financial advisor who is trying to do that sort of as part of their role. And, to be clear, lots of financial advisors have done it successfully for a long period of time, so this isn't sort of saying everyone has to have a DFM. We obviously think that it can add significantly to an advice process, and they've managed to mitigate the cost through scale.
Speaker 4:So actually it's not a big cost to the end user, is it?
Speaker 2:And another point which Ian brought up earlier is that you go on a passive like the S&P, you're missing out on other products that are tax efficient. That's what Bonner and I play a role in to bring a financial plan to you that's tax efficient as well and it also serves all the roles.
Speaker 1:You just buy.
Speaker 2:There's got to be an estate plan, like we were talking about walls and the importance of a wall and how that fits in and the costs that go with dying, and that importance of a will and how that fits in and the costs that go with dying and that kind of stuff. We we look after all those elements of it. But what we don't do well is what ian does well and his team does well is firstly, keep their clients money safe. That's of paramount importance.
Speaker 2:As you're, there's no scams. There's no funny companies that we deal with. It's they go and research the companies. They go and actually physically visit Alan Gray and they speak to Duncan Artis and they ask him what his opinion is. So if Duncan leaves, they know he's gonna leave long before. We know he's gonna leave and they might make another call on Alan Gray or any of the funds that we deal with. So there's no funny funds, no under the radar, no anything that could go wrong. The client's money is safe. That's very important and of course we're trying to make sure it grows at a good rate.
Speaker 1:Do you feel like you have a clearer idea now of what a DFM?
Speaker 4:is Absolutely and it's something I've always said is you know, if you're going to go record an album, you go to a really good sound engineer, a really good producer. You use the right people. Um, if you, if you want someone to manage your money and you're not a financially savvy person, um, and it's not what you do for a living, then maybe go get somebody who knows what they're doing.
Speaker 2:I think the problem is yeah, I just yeah.
Speaker 4:All the platforms like tick tock and facebook have got rubbish on them that's why I approached about the s&P, because I think that if it was that easy, we'd all be very wealthy. Well, I think we've got a really good understanding of what a DFM does and what you do at Fundhouse. So, if that's okay, thank you very much for coming today.
Speaker 1:Thank you so much, Ian. Thank you for your time.
Speaker 2:Thanks to all of you. Good to have you. Thank you for listening. If you have enjoyed this podcast and would like to subscribe, please visit our website, wwwgrowthfpcoza. The information we have provided in this podcast is our personal opinion. For more detailed information, please discuss your financial situation with a financial planner.