One of the fastest growing sectors when it comes to investment advice and management is that of discretionary management. But what happened to cause this evolution? It’s simply that the investment universe became more complex and complicated, both for consumers and their advisors. Legislation became more rigid – for good reason, all things considered – demanding more and more of advisors in structuring their clients’ portfolios. Then the information age arrived, leading to consumerism at its best. Clients are permanently online gaining knowledge, which they then use to challenge their advisors on the solutions proffered. Compliance added to advisors’ workload, which was already high, and stretched them almost to their maximum time limits. All of this is before we even consider the required annual reviews for each client and their investment portfolios.
So how did (or does) the man-in-the-middle cope with the additional regulations, detailed compliance, widening investment horizons, growing consumerism, etc.? Enter the discretionary investment manager (DIM). Investment management can be defined as, “The professional management of client funds in and across asset classes (shares, bonds, real estate, etc.) in order to meet specified investment goals for the benefit of the investors.”
Recognising the challenges ahead, a number of existing Category I FSPs set up a DIM area within their FSP and hired skills dedicated to the investment management of their advisors’ clients. Now the advisors could concentrate on the advice process (financial needs analysis, pre- and post-retirement planning, estate planning and liquidity, risk profiling, etc.) while the DIM area could concentrate on the investment management process.
Similarly, a number of advisory firms with multiple offices across SA anticipated the same challenges and also saw the potential for investment advice risk because of the geographic spread of their advisors. These firms also started up dedicated DIM companies within their groups to offer investment management services to all their groups’ advisors’ clients.
Then enter the Retail DIM. Seeing all of the above challenges, and recognising that a number of Category I FSPs may not have the infrastructure to set up their own DIMs, these players set up independent DIMs to provide investment management services to external, independent Category I FSPs and their clients.
And so the investment world turned.
Now surely all the additional attention discretionary investment management is getting can and will only be good for clients – true TCF in action! But along with the good come the challenges of standards, minimum criteria, education, qualification and all the other good stuff that is inevitable in a (relatively) new and growing sector. Enter the FSB … the regulator … the enforcer … to ensure that Category IIs are genuine, value adding services that operate in clients’ best interest – and rightfully so.
Expect some changes down the line to better regulate this growing sector, which, if managed and implemented properly, can only improve clients’ experience and enable advisors to focus on what they do best!
The FIA is always striving to accommodate the changing face of both the advice discipline and our diverse membership. The association recently established a dedicated subcommittee for DIMs, FSPs that conduct business under Category II licence. The objective of this committee is to engage with the regulator in setting professional standards and introducing a code of conduct. The committee also serves more generally as a voice for DIMs in South Africa. In this regard a number of papers, presentations, and submissions have been made to the FSB, followed up with a number of face-to- face meetings.
The future looks bright for DIMs.