Speaker 0:
welcome to us at T V's navigating regulation in the DFM space with me Joanne Banham. Today I'm joined by Flobe Yates, head of Equilibrium by Momentum and Marisa Van der Merwe executive at Welcome to you both. Ok, uh, Nav navigating regulation. These are all rather big words. So let's start with some smaller words, right? Marisa, I'm gonna start with you.

Speaker 0:
C one C two. It's a term we just throw into the mix. What is a cat? One on? If you can tell me what a cat two is, what's a cat one? OK,

Speaker 1:
so, um within the context of financial advisors practise. Yeah. So a cat one is a, um, advisor practise that actually looks after client holistically. Um, from financial planning perspective and within the perspective of AD FM, they often knock on the DF m's door to assist them to help build investment solutions for them.

Speaker 1:
Um, they will then adopt that investment solution. And they actually then offer this as part of their financial planning offering to their clients. Are

Speaker 0:
they allowed to run their own investment solutions?

Speaker 1:
They don't have the licencing requirement to do so. Um, in terms of what the regulator wants, um, so no. Unless they've got their own C two licence as well. So

Speaker 0:
if they are running investment portfolios, they'd be in breach of a licence. Is that correct? Unless they outsource that to AD FM Is that a true statement or not?

Speaker 0:
Is a tricky

Speaker 1:
it's a tricky one because it's actually how the financial services, um, market has evolution. Um, you know the financial advisors, Historically, maybe if you dial the clock back 10, 15 years ago, um, their value proposition and maybe some of them still believe it today has been selecting funds. Um, and it's really expanded a lot broader in terms of what clients, um, need from advisors in in terms of putting a full financial plan together, but also in terms of what the regulator

Speaker 1:
expects. When you are putting solutions together, um, so you sit with the Maybe the advisors got the, uh, the ability to do manager selection. But there's portfolio construction capability that they need to have, and the regulator actually wants the advisor to show that they've got the skill

Speaker 1:
and that they've taken the key and diligence in terms of how they put the solution together. where the ultimate goal is, um, to put solutions together that will maximise returns for the level of risk that the clients are able to tolerate. So

Speaker 0:
it has been partly regulation led in terms of how this works. And now, then you have a cut two.

Speaker 0:
So what's the difference in a cut two and account one? And how does it work? OK, so So as Marise said, a cat one is an advisor. They're basically licenced to give financial advice. Uh, and the whole spectrum of advice and obviously not all of them actually even participate in the investment side. A Catch two is an asset manager. So if you're in possession of a cat two licence, then you are legally,

Speaker 0:
um, allowed to run portfolios to answer your question. So So when you said earlier, uh, is a cat one in breach? If they're running their own portfolios, well, they actually wouldn't be allowed to manage portfolios. So what they typically do is they select, um, funds managed by other asset managers, and and then they're not in breach. They take the advice risk, though, Um, and that's why they often do a needs analysis to make sure that it meets. What the what? The client is looking for a cat two. However,

Speaker 0:
um, under phase is required to construct portfolios to, uh, deliver on certain outcomes. It's normally regulated through a mandate, and the mandate would state what you can and can't do. Um, and and it also. Then, if you're comparing it to other mandates, um, I think you you'd say that a. A discretionary fund manager or a cat, too,

Speaker 0:
um, would typically show their portfolios. And they might even compare it to the peer group that they sit in, whether it's a conservative or medium equity or multi asset. Flexible, Um, but they are the actual person running the portfolios. So Cap two would make decisions on things like, uh, asset allocation. Which asset classes they want to be in.

Speaker 0:
Um, they might do, um, fund selection, but it's a more scientific method of putting together portfolios. It's not just split funding between existing funds, and they might decide whether to execute through a model portfolio or a fund of funds. Um, they'd often been, uh, involved in things like, uh, mandate design and running a portfolio holistically.

Speaker 0:
OK, so give me some idea of what the differences are. Let's pretend I'm a cat one, and I want to become a cat two. So what do I need to do? Is there some capital requirements? Do I need cash flow in the bank account? Do I need skill requirements? Maybe. Marisa, you can answer this. You know, if I think I want to run portfolios, I want to do my own portfolio construction.

Speaker 0:
What? What do I need? So people can understand very clearly what the differences are.

Speaker 1:
OK, so first of all, from a you need a licence and to get a licence, um, you need to have the required skill and actually experience so often there's a process of supervision. Um, that you have to undergo to, um, to require your care to licence. Um, I don't want to go into too much detail about that. There is capital adequacy requirements. Um, and it's not

Speaker 1:
it. It is a There is an expense to running AC two solution. So now that you've got you've got your cat two. What is it? What is the team? Uh, what is it you need to have to show that you've got skill? Um, in your business. So just to to add again to what has said around in its basic, uh, terms, uh, AD FM or a cat two, is trying to manage solution solutions to maximise the return

Speaker 1:
for, um, the level of risk that the client is willing to take. And to do that, they need to have manager research. They need to have macro research or a view on a allocation. For that, they need analysts. Um, or they need to get their research or buy their research from somewhere, and then they need to have the ability to put this all together. They need to have a philosophy on portfolio construction,

Speaker 1:
and now that they've got their solution in place, it's critical that they are actively managing it according to the mandate, as mentioned before, according to regulation, if it's Regulation 28 portfolio, um, and, um, also according to what's happening in the market if there's any trades or changes to managers that need to actively manage the solution. And I think the critical thing is, uh, an advice

Speaker 1:
Avis, a cat one advisor can maybe claim that they can do all the other pieces if they insource some of that capability and having an analyst or two in in in their office. But they don't have the ability or the licence to actually do bulk trading or to update to actively manage these sport failures. So in

Speaker 0:
plain English, then the client to sign off on every trade they do and a cat two, they don't correct.

Speaker 0:
Would that be a correct statement? You have permission to trade on behalf of the client as a cat two, as the DFM does as a cat two financial advisor does. But a cat one financial advisor cannot sign off on trades. The client has to Would that be a clear distinction between the two? Definitely. So So so A very simple example. If, um, one is running a portfolio or or said to a client, you can invest in, um, three underlying funds. And now they want to make a change. They would actually have to get a physical signature,

Speaker 0:
uh, to switch out of the fund that they want the client switching out of a cat two. A discretionary fund. Uh, manager has a discretionary licence, and what that means is that once the uh, investor has signed our mandate. We then have full discretion to run the investments in the way that we see fit.

Speaker 0:
So within the ambit of the mandate, we obviously can't go out of mandate. Um, but any asset allocation decisions underlying fund decisions, uh, tactical calls we do according to our skill set. And we don't need a client signature, um, or their permission. OK,

Speaker 0:
so I'd imagine from one part of view is that a You could argue that cat one might not have the skill set, but there's also a lot of admin behind signing off. So to make a business run more smoothly, practise management, presumably AD FM will add a huge amount of value from a just running the business better. So let let's talk about

Speaker 0:
I think what's become very blurred in our industry is clearly there's a There's a need for DF MS, particularly for cat one. I affairs, um, what is it becoming a little bit blurred about? What's their responsibility and what's the responsibility of the DFM? So I think I'll kick kick off with you, Marisa, if you can just give me an idea of things you've seen in practise where people think. Oh, but that's AD F MS responsibility.

Speaker 0:
I have a very long question here. But like, what? What is the where are the lines blurred and why? OK,

Speaker 1:
so I think the lines are blurred because of the advisor. That's evolution is in into the professional advice and and that it's not only looking at the investments of of a client, but realistically looking at the whole financial planner of of a of A client and then journeying with that client. Now for me, I think where the lines are are coming. Becoming a bit blurred is, um,

Speaker 1:
around the suitability of advice and and making sure that the the solution or understanding the risk profile of the client, um, that they match it according to the correct investment strategy. And and there, um

Speaker 1:
so So it's the evolution of the advisor stepping out of of having their fingers and managing portfolio on a day to day basis. But it's also the advise, the as as AD FM. I think we need to talk a little bit clearer in plain language, and we need to speak the language of the advisor when they're dispensing advice. Um, because it's around the suitability of advice that's it squarely in the financial advisors camp.

Speaker 1:
But they need to then make sure that when we talk about the investment solution that we are clear around, what is the expected potential loss in in these portfolios so that the advisor can manage client expectations better from the get go with their client? So

Speaker 0:
let's go back to plain English. Are you saying? And IFA needs to understand that if they're putting a client into a

Speaker 0:
real rate return of 6% portfolio and the client is very low risk, it's clearly an advice issue here. They can't blame the D FA for poor returns because they put it in the wrong fund to begin with. Is that what you're saying that they they are ultimately responsible for advice? Financial Advisor advice is in the name, but the actual running of the is your responsibility, but they need to make sure they understand what that is.

Speaker 1:
100%. And that's

Speaker 1:
also the role of AD FM. It's really around, um, reporting and and and really making sure that the advisers that are utilising their solutions are very clear on what the mandate is and what they're trying to achieve in the solution so that there's alignment in in in the advice that is provided, but also give the advisor the tools and the content and the education needed to have better conversations with their clients. To get that alignment, um, from the client

Speaker 1:
through to the advice provided through to the DFM that's managing the solution we've we've experienced a lot of volatility, um, in our markets in the last say for me since he since he off happened. And um, it's you, unfortunately see behaviour tax. Uh, that's now a term in in our industry where it's it's clients are making the wrong decisions at the wrong time. So it's

Speaker 1:
selling at the bottom when there's a correction in the market and then waiting on the sidelines until things clear up. And it's human nature. Um, you know, you become emotional about investment decision making, but they wait on the sidelines and then they buy again when they, you know when the prices are high. So there's a There's this tax

Speaker 1:
behaviour tax around, um, capital loss that's been locked in, um, which, when it come

Speaker 0:
back to behaviour tax, I think it's vitally important, and I think you guys play a huge role in helping in that. But just park that for a second. So you're just saying is sometimes there is a mismatch between advice given

Speaker 0:
and the funds that are presented. And you you got to be very clear when you're presenting to an IFA just what you're giving. Can you give us any more colour on that? Because it seems quite obvious, but maybe just give me some if you can. So so I think if we look back in time and we see where the industry came from, what advisor um usually do is when they selecting, um, which funds to put their clients into.

Speaker 0:
They typically look at either brands that are well known brands and because it's easier if you've got a Well-known brand and they perform badly to say it to your client. But I've chosen a successful, uh, investment company. They're just going through bad performance, or the other thing that they do is they pick um, an asset manager or a fund based on past performance. Now, now, as investment professionals, we know past performance is in no way indicative of future performance

Speaker 0:
So I think trying to understand the outcomes that the advisor is solving for is very important for us as DF MS. So so at equilibrium. We always say we partner with the advisor and and that's true, we partner with the advisor. We actually don't always meet the end investor.

Speaker 0:
So it's as important for us to understand the way they give advice as it is for them to understand the way we construct portfolios. Uh, and I think there's also been a misalignment between investment industry and the advice industry. So if an advisor is picking, um solutions just based on past performance and good brand,

Speaker 0:
it doesn't mean that the outcome or the benchmark is actually aligned to what the client wants. You mentioned real returns just now, So if a client is looking for a real return, then you've got to make sure that the portfolio is giving you that real return, so the benchmark should be a real return or CP I plus benchmark. Often the benchmarks have been pure

Speaker 0:
industry benchmarks. Um, and I'd argue that that's completely misaligned because in a rising tide, all ships rise. So if all the funds in the portfolio are giving you positive returns. It doesn't necessarily mean they're beating inflation. So I think where DF MS have added value is they've almost,

Speaker 0:
um, consolidated. Or or they almost bridge that gap between investment and advice. And typically we build solutions that are a lot more large to the advice process. So, for example, clients might say to us We're looking for a solution for our living annuity clients or for people who are drawing an income. Um, and we want to make sure that they don't lose too much capital, so they still want some capital growth. But they can't stomach more than, let's say, a 2% drawdown in any given 12 month period.

Speaker 0:
Then we know when we build the portfolio that we can't have too many assets and growth assets because the volatility is too large and the drawdowns will be in some instances, a lot larger than 2% and the client will disinvest like Marisa said, and then they don't land up getting any of the benefits of the investment.

Speaker 0:
Whereas in the more aggressive portfolios where we've got a longer term horizon, we know that we can stomach, uh, larger drawdowns over rolling 12 any 12 month period because we've got the luxury of time. Marisa. There's lots of terminology out there. We talk about model portfolios. We talk about CIS structures. We talk about multi management portfolios.

Speaker 0:
Perhaps you can explain to us, in layman's terms what all these three things are.

Speaker 1:
So a unit trusts portfolio. Um, is often referred to CISS, a collective investment scheme, or CIS um, which is often also referred to as a multi manager product. Um, it's regulated by CS a, um, for more regulation, and it's been in existence for quite a long time, and it's also

Speaker 1:
unit. So as an investor, when you invest in a unit trusts you actually get a unit price or you buy units and in the unit trusts. And um, if you look on your statement on a on on the A list platform, you'll see one a one liner. Um, you you invested in one fund, even though it can be a multi manager product, which means it's got multiple funds in the solution.

Speaker 1:
Um, so you're not putting all your eggs in one basket, contrary to popular belief. On the other hand, a model portfolio which is often or have been known as a rap fund as well, is something that's quite new to the industry. I would say in the last 10 years it it it kind of pop popped up, and it

Speaker 1:
it's, um functionality that was created by platforms model portfolio functionality where you can invest in a combination of funds that they wrap or they they put in, they they can't unitize it, but they group it together as a as a portfolio. Um, so when the client looks at a statement, they will see they invested in five funds and maybe the model put a full name is ABC model

Speaker 1:
Um, why is it so popular? Because they can see

Speaker 1:
the underlying managers that they invested in. And previously we spoke about brand names. Um, so maybe you, the DFM that are not a familiar brand name that's assisting them, putting the solution together. But the client between advising and client. When they're having the conversation, they can see what they invested in. Now model portfolios aren't regulated and not, um, not to any two lists or the same, and how they are rolling out the model portfolio functionality. So

Speaker 1:
and and also a model port failure and a and A unit trust. We are agnostic to kind of which one is the best, because there are pros and cons to each. But I. I don't think it's well understood the difference necessarily always. And when you are producing or delivering a fun fact sheet for the solution, that's either a model put failure unit trusts. There's a lot of nuances there as well. Um, which means you are often not comparing apples to apples.

Speaker 0:
Let's just stay on the idea of, um, disclosure. So in a model

Speaker 0:
further, the client sees all the underlying funds. And, as you say, maybe the DFM is not well known. But the underlying managers are probably well known, presumably in a multi management space. You could just show the underlying funds as well you could. You may not hold them directly, but you could still hold them so forth. Why, if I'm a client, do I care if it's wrapped up in a unit trust or when it's wrapped in a model? I mean, I mean wrong terminology, I'm guessing. But But if I can see the underlying funds in the multi management solution.

Speaker 0:
Why would I choose the model portfolio solution? So, um, the unit trusts whether they're single asset class, multi manager or funder funds. They actually our regulator and a CIA. So there are certain things you have to disclose in a fact sheet.

Speaker 0:
Um, for example, you've got to show your top 10 holdings. Um, so you might have, uh, uh, exposure to a fund that is not large. It won't show up. Um, and typically, what you show in your top 10 holdings are the actual underlying stocks. That's that's the first difference. Um, uh, the advantage of going through a collective investment scheme, a unit trust, whether it's single or multi

Speaker 0:
managed, is that in a multi managed, um um, portfolio. Any changes you make are done within that one fund so it doesn't trigger, um, capital gains tax. So, for example, if you decide to reduce your equity exposure, increase your bond exposure, it doesn't trigger CGT because it's done within a fund in a model portfolio.

Speaker 0:
It's not a legal entity. A model portfolio is more a we would say an administrative rep. Um, so it doesn't any change you make, you actually could trigger CGT whether it's in the asset allocation or in the underlying funds. Um, so that's one of the disadvantages to a client.

Speaker 0:
But I would say that the reason a lot of advisors like the model portfolio execution is because from a, um, see-through perspective, it's more transparent and that you see all the holdings. Um, whereas in the unit trust, you don't have to show all the holdings. You just have to show the top, um, the top 10

Speaker 0:
and the other big difference between the two and we also completely agnostic. We have some clients that execute funder funds. Um and I'd say that most C one advisor then use, uh, uh, model portfolios. Um, there is an argument that the model portfolios also offer more transparency in terms of fees, because you typically show the underlying fees for each of the funds that you've got, and then you show the DFM fees separately.

Speaker 0:
Whereas if you're the portfolio manager running a a multi managed portfolio, you would show the overall fee. Um, and you won't necessarily get to see what fee classes you're paying or what arrangement you have with the underlying. Now, I actually think

Speaker 0:
that regardless of which one you're executing through, you should always compare fees, um, on the total investment charge, which means you're comparing the full fee things like trading costs, um, the underlying manager fees as well as the DFM or multi manager fee. Um, and then the other thing is how they regulate it. So I think that's a very important distinction between the two.

Speaker 0:
In AC IS structure, you can't show things like past performance simulated performance. Um, you're not supposed to show any performance until you've got at least a six month track record, whereas in a model portfolio you could put together a, um, fact sheet for the first month that you've been running and then show simulated returns.

Speaker 0:
Um, and obviously that's not ideal. It's not transparent, and it's I. I would argue that you can't claim that performance because it's not actually your own. It's not your track record. And the great irony is actually sometimes past performance, if it's bad, is a much better selling tool. If a client understood it because I always think it's amusing when you show really

Speaker 0:
past performance numbers, but actually those are the funds you don't want to be buying. You actually want to buy the funds that are done badly and you want to buy something new. But that's a whole whole new story. I I It's always amazes me that you you have to show past performance is great. Why? Because it might not be repeated. And also, And I think what's very important as well is, is

Speaker 0:
understanding how that past performance has come in. So if it's if we're going through a value cycle, you'd expect value managers to do better than your managers who follow a different philosophy. Um, and if there's a performance fee, I think that that's also another big issue that I think, um, investors don't always understand.

Speaker 0:
Coming into a fund that's had great past performance is is fantastic if you believe it's repeatable and and maybe it is, and sometimes it's not. But sometimes you come into a fund based purely on past performance, and you're paying a performance fee that takes into account performance over the last two or three years, and you could come into the fund as an investor and the fund underperforms

Speaker 0:
and you're still paying a past performance on performance that you personally as an investor have never experienced we We've had lots of discussions on that on Asset TV, and I think it's very complicated. The whole performance fee issue and there's various people have written very good articles on it. But let's just stick to the DFM space and obviously something

Speaker 0:
use people to be aware of performance fees. But Marisa, you you were quite clear to me when we chatted. Before that. You're very worried about the transparency of returns in the space. Maybe give us some more colour because there seems to be lots of people who give surveys on this D offended really well. And this DM did really well. But

Speaker 0:
you don't think it's apples for apples, so just maybe give us more colour what you're thinking. OK, so

Speaker 1:
in a in a unit, trusts did give us quite a nice um, outline in terms of what a fact sheets need need to look like from a unit trusts perspective. Um, one of the regulations on performance is that it's, um, net of all fees. So if she spoke about the TR and the TRC,

Speaker 1:
um, let's go for that expense ratio apologies and then plus your investment charges. So it's the trading of the underlying managers. That collective charge is a total investment charge. OK, um, it includes fat and and the performance that you see on that fact sheet is already taken into account those fees. So that is the performance that the client will receive if they invested in the solution.

Speaker 1:
If we then look at a model portfolio fact sheet, you might have all of the costs. Um and sometimes it the TRS aren't shown on there. It can be quite creative. And it also depends on the systems that you've got, um, as it as a as a as a model put failure or DFM running a model put failure. But

Speaker 1:
if you're lucky enough to have a T IC on the fact sheet, very seldom do you see that the performance that's shown on there is net of all of those fees often gross of your own DFM fee, Um, or before so network is

Speaker 0:
not specified on the fact sheet does. Does it say somewhere in the fact sheet this is gross of fees? Or is it

Speaker 1:
Is it it? It should be disclosed. Um, does it

Speaker 0:
have to be disclosed.

Speaker 1:
I don't think there's there is no regulation on model, so I don't know who's scrutinising the fact sheets to make sure that, um, it's that that you're ticking all the right boxes or that you are Well,

Speaker 0:
presumably somebody watching this today now and has AD FM relationship will. Now go look at their fact sheets and we'll check because that's your point. It needs to be highlighted right and and

Speaker 1:
often what you What you see is if AD FM run both unit trust,

Speaker 1:
um solutions and model put failures, they follow the same methodology, Um, to put the model put failure fact sheets together as what they've done in the unit trusts. That is the right approach, I would say, um, even though it's not form formally regulated. That is how you treat clients fairly.

Speaker 1:
But it cannot be guaranteed that that is how the old industry is doing it, because there's some DF MS that are only running model portfolios again. I'm not There's no pro or con.

Speaker 0:
You two have made it very clear you, you're not you're not pro con either. That's what the client wants. At the end of

Speaker 1:
the day, it's often the advice. It's often the advice that's being dispensed by the client that determines the one or the other. And and often it's very interesting for me how some advisors are extremely comfortable with the unit trusts or with model put failures.

Speaker 1:
I think

Speaker 0:
the execution needs to be what's most appropriate for the client. Um, and the advisor needs to decide whether it should be executed through a model portfolio or through a fund of funds. Um, so, so I. I actually think that's up to the advisor to to decide. Although, um, if you're putting together a bespoke solution for an advisor, you can't, uh, launch a fund of funds in their name.

Speaker 0:
Um, unless they have a cat, too, because they're not. They're not licenced to do that, but I think it it's It's also a little bit more than that. I think. Look, firstly, I 100% think that you should always look at performance net of all investment fees, and that includes our fees as well as any of the underlying fees that we get from the underlying managers and because that's the performance that the client actually experiences.

Speaker 0:
Um, and I think when you're doing comparisons, you should make sure that you're doing a net of fees for net or fee comparison. Um, the other thing is,

Speaker 0:
it's not regulated in the model world, but we are all supposed to be running investments in the spirit of the law. And the spirit of the law certainly encourages you to show performance. Net of fees.

Speaker 0:
Um, so if you're not doing that on a fact sheet, I'd argue that it's not in the spirit of the law and and the people who should be checking the disclosures of the compliance officers at at each of the DF MS or multi managers offices. And and and I'd argue that certainly most of them would have quite a strong view. Certainly now, in,

Speaker 0:
um, in our group, we we have to show performance and net of fees so you say the word spirit of the law. But then that's quite a grey area, and clearly it's a lot easier to sell a fund with better returns if the fees aren't disclosed. So that's a no brainer, right? So do you think regulation will get tighter in the DFM space? Because clearly there are some cowboys out there doing different things, and you're not saying you're them. You're clearly not clearly not, but but there are maybe some of them exist. So do you think regulation will get tighter, Theresa?

Speaker 1:
Um, I do think it it will I. I think what we're seeing at the moment is you've got different groups. Um, city wise. An example, um, is trying to Well, they're taking some of their learnings, um, globally and bringing it to South Africa to try and regulate, uh, model put performance. Because

Speaker 1:
as it stands today, if I open the the newspaper, um, if you're DFM and you've got unit trusts, the performance is available on there. If I go on to the morning star system or any performance system that I'm drawing a fund list from, I'll be able to see all the unit trust that that the DFM are running.

Speaker 1:
There's no way that I can see that for the performance track record for any model put failures. It's just not available in the public domain. So I would have to rely on going on to the website of all of these DF MS to look at the performance. Their fact sheets that they've put together and then put together my own excel sheet to see if it's comparative relative to the unit trust. So there's definitely the industry is pulling together, Um, because there's a need to have one place where you can actually compare

Speaker 1:
solutions, the performance of the track record, irrespective if it's a unit trusts or model port failure,

Speaker 1:
um, and then trying to deal with the fact that a lot of failures aren't governed. OK, so

Speaker 0:
I'm hearing from both of you that the spirit of the law and this and regulation will probably get better. And maybe there's best practise from offshore coming into our markets before we add, because we're sort of running out of time. Can I just add one point to that? And the problem with a lot of the surveys that are being done in South Africa is they're still not doing the performance or fee. So you mentioned city wire. It's being done on a gross basis. So again, you can't really compare apples with apples because you don't know,

Speaker 0:
um, what the fees are, Um, and also sometimes some of the things they look at in those surveys are like, um service, and then they go and survey the DF. M's clients. Now, I'd hope that all of our clients are happy with the service. Otherwise, they would fire us. So again, it's a little bit biassed. Um, I would welcome,

Speaker 0:
um, a survey that firstly is net of fees and that looks at actual performance. Attributions risk. Um, how we we come up, you know, whether the benchmarks make sense? Um, the differences in the peer group, offshore components versus local components. I mean, that's an issue in the unit trust space as well. At the moment, it's such a big discrepancy. Um, and then the other thing is that there is regulation coming. So already the licencing requirements. I think there are now over 600 listed twos in South Africa.

Speaker 0:
Um, and the regulator the only bit that's outstanding. Um, under the RDR. The retail distribution review, uh, legislation is actually the licence requirements, and already we can see that they're starting to become stricter. And if you're offering a service or you you say you're AD FM and you're charging a fee for a whole bunch of services you don't offer.

Speaker 0:
Then, um, you are gonna come under fire and potentially not be able to keep that licence. So the other big thing that I've certainly seen in the last 18 months is that other oos are pointing DF MS to assist them with the services they are No, not actually providing. Um so you know, not all DF MS have are the same. We don't all have the same skill sets.

Speaker 0:
OK, which brings me to that last point that you talked about just now. Behavioural tax. Whose responsibility is behavioural finance? The IFA or the DFM? Marisa,

Speaker 1:
I would say it's it's the industry's responsibility. Collectively, Um, we have to take hands from a I've put my DFM hat on. I think we can do a lot more around our reporting and how we explain, um,

Speaker 1:
what we're trying to achieve with the fund and what the potential losses, um, could be in the fund. We need to move away from back looking at back past performance because it's not an indication of future performance. It's loud and clear and very clear on every disclaim. I can guarantee you

Speaker 1:
it is in legislation. You have to have that it will be in any disclaimer yet that's all that we've got as an industry. So we're really trying to focus on forward testing or stress testing or portfolio to give an indication of the potential capital loss you'll receive or get from in in bad scenarios. Bad, bad circumstances that you'll get from your investment portfolio.

Speaker 1:
And then it's taking hands with the advisor, giving them the right tools that I've just I've mentioned the forward testing ability and also the right content or education to talk to,

Speaker 1:
um, what is quite complex in in the investment world. So it's it's around taking hands but ultimately the suitability of advice. Um sits with the advisor dispensing the advice. And when they are putting the client in an investment solution

Speaker 0:
behavioural finance. So whose? Whose responsibility is it? Do you want to train an IFA

Speaker 0:
if they can understand it, or should they do it themselves? Well, look, I actually think that IFA S, um do a lot more than just give advice. They also financial coaches. Um, well, that's the finance side of things, right? Psychology? Yeah, they become psychologists, but But I I'm not sure that everyone always understands it. So we've done a lot of research. In fact, um

Speaker 0:
uh, for one of our large network clients, we we did a research where we looked at how many of their clients have actually gotten CP I and CP I plus returns. And, um, there were two very interesting things that came out of that. Um, firstly, a huge percentage of the advi of their client didn't get even CPR, um, over the last five years or 10 years. And then when we look a little bit deeper, we realised that the main reason for that is that switching behaviour,

Speaker 0:
um, that Marisa mentioned earlier Now we would call that a behavioural tax. Um, So what happens is the volatility in the portfolio. Clients can't stomach it. So as soon as they the drawdowns are very high, they just exit the portfolio, and then they always get back in after the fact. Now, if they stayed in those portfolios provided their good portfolios, they probably would have got CP. I plus returns through the cycle, but it

Speaker 0:
switching behaviour, that's bad. So I think we have a dual responsibility. We need to share that sort of information with our advisors. Our advice partners, um and they then need to explain that to the end, investor their clients, Um, so that they understand the impact of making these these choices. Um, and I think there's a lot being done in the industry now. A lot of asset managers have behavioural finance arms. We do as well.

Speaker 0:
Um, looking at the effect of that behaviour and also understanding what drives people to make decisions. Uh, and and that's probably the main reason why when we construct portfolios, we are actually cognizant not only of getting to that outcome, but the journey that we take to get there, Um, so that we get consistency of returns during different market cycles and and having that consistently and knowing what to expect from your DFM or your asset manager,

Speaker 0:
uh, I think makes it easier to then explain to your end investor,

Speaker 0:
which is the suitable product. Um, can they stomach the drawdowns? What happens if they're not getting to the art performance that they're looking for? And I think that again, it's it's bridging that advice and investment, um, side and making sure the clients understand it and the impact on their long term wealth just to sum up, I'm guessing. Give them the good advice to begin with. Not when they're in it.

Speaker 1:
Sorry, just a critical point. Uh, there is

Speaker 1:
It's It's giving advisor the time that they need to spend more time with their clients. And I think all advisors wanna kind of play this financial coaching role. Help the clients to make better decisions at the right time. But I've and we we started the conversation talking about the role of the DFM. Yes, it's definitely the investment capability, which is a big tick, but it's around the technology,

Speaker 1:
energy and how you enable the advisers to get out of the engine room of their business with regulation and and everything that's been thrown on to financial advisors. No wonder they, you know, we see that they are spending less and less time with their clients. So if you've got multiple touch points with your clients, either through digital communication and then you know also from a face to face perspective,

Speaker 1:
the the clients, I think will will understand investments better, will be more prepared for the volatile periods and won't then have this knee jerk reaction which we now term is behaviour tax so yeah, we we taking hands as an industry, enabling the advisers to get in front of their clients. They're good in front of clients. That's where they get their energy from. And we've got that capability as AD FM. We've got the resources, we've got the know how.

Speaker 1:
Um and that's why I'm so passionate about AD FM relationship with a financial advisor because the the combination is is magic. Um, in terms of the outcome that you can deliver for the investor

Speaker 0:
and particularly if you guys can cut the fees at the T ER level or T IC level, you know, because everyone's winning guys, thank you very much. That was very interesting. And I hope anybody watching this today have learned some new terms and it all kind of not Greek anymore to anyone. So hopefully they know what a cat one or cat two is. And that's great. Thanks, guys. Thank you.

Speaker 1:
Thank you so much.