In an era of rapid change traditional financial advice models are being challenged, necessitating the re-evaluation of existing practices and creating new ways of thinking.
Introduction
In an era of rapid change traditional financial advice models are being challenged, necessitating the re-evaluation of existing practices and creating new ways of thinking. The South African wealth management landscape is undergoing a significant transformation, driven by evolving client needs, technological advancements, and shifting regulatory dynamics. At the heart of this evolution lies the key role of financial advisers, whose segmentation and influence are growing by the day.
Discretionary Fund Managers (DFMs) are fortunate to engage with advisers across the industry. As we navigate this dynamic environment, it becomes increasingly imperative to assess what is shifting the industry landscape. This article aims to provide a lens through which we can examine the current state and future trajectory of wealth management in SA, as well as the role DFMs will play in this evolution.
Current landscape
As one of the largest DFMs in the country, we are fortunate to be able to access high quality research conducted on our industry. According to 1 NMG, there are 16 300 financial advisers in South Africa that influence approximately R2 trillion in assets under advice. To put this into perspective, the size of the local CIS (unit trust) industry is currently approximately 2 R3.9 trillion. This highlights the immense power and reach of these professionals in shaping the financial futures of South Africans.
Interestingly, the market is split almost evenly between tied advisers (those aligned with specific insurers or banks) and independent financial advisers (IFAs). There are approximately 8 500 tied advisers, that manage a substantial R400 billion, while 7 800 IFAs hold a commanding R1.6 trillion. Although this disparity underscores the growing impact of independent advice, more interesting facts start to emerge when delving deeper into the numbers.
Behind the research
For purposes of the research, NMG broke down the IFA segment into seven distinct categories, each with its unique characteristics and client base.
Opportunity set
DFMs are well placed to play an increasingly important role in the South African wealth management industry. According to NMG, 67% of IFAs interviewed in their research, excluding networks, have already partnered with a DFM. DFMs generally offer a range of services, including portfolio construction, asset allocation, and risk management. As wealth management becomes more complex, advisers are increasingly turning to DFMs to provide specialised investment expertise and support. But given that the needs of each adviser cohort are so unique, there is unfortunately no ‘cookie-cutter’ approach to success when dealing with IFAs.
General practitioners (GPs)…network potential
While GPs offer a significant opportunity for growth in the DFM market – given the number of advisers and that most of them are young and growing their books – the sheer volume of advisers and geographical dispersion makes it extremely difficult to provide a comprehensive service offering. GPs are thus generally underserved by the DFM market.
GPs still tend to ‘pick funds’ when they come across an investment client. It is our view that DFMs, not linked to larger organisations, will struggle to gain traction in this space given limited resources and lack of distribution reach. This presents a great opportunity for DFMs with access to large distribution networks.
Investment specialists...smaller opening
The best opportunity for most DFMs looking to grow their assets is in the investment specialist IFA category – those with assets between R150 - R250 million under advice. These advisers are specialised and focus solely on investments as opposed to broader financial solutions such as risk. But given the rapid growth of DFMs in SA, this opportunity is quickly closing. Most of the DFMs that launched in the past four to five years have built their business cases to ‘capture’ this market.
Holistic advisers…a saturated market
Holistic advisers – often seen as the ‘grail’ of advisers in SA – have of late become a difficult segment to penetrate for DFMs. When references by DFMs are made that the adviser market is ‘saturated’ this is the market often referred to. Besides the limited number of advisers in this segment, of which many also have a Category II Investment license, many have partnered up with DFMs who have had a ‘first mover’ advantage over the past 10 years. These partnerships are typically based on strong relationships often thought of as ‘unbreakable’. As this market starts to mature and succession is on the cards, DFMs without an answer to this succession problem, or at least linked to an adviser network, will struggle to maintain the status quo. We foresee a large shakeup in this market segment over the next five years.
Networks… DFMs continue to grow
The main beneficiaries of IFAs, regardless of the category, looking for succession, security and a ‘place to belong’ have been and will continue to be the Retail Financial Adviser (RFA) networks – both advice-owned and provider owned. These networks are attractive to advisers leaving insurers and banks as they are positioned as ‘independent’ but offer some of the security of being part of a larger group or team. We have seen massive growth in assets under advice and management over the past few years into networks, with DFMs linked to them having benefitted handsomely.
Trends…we need one another
The growth and evolution of the wealth management space is intertwined with the growth and evolution of the DFM space. The two work hand-in-hand and will continue to flourish because of each other, not despite each other.
Besides the impact of DFMs, there are clear trends emerging from the wealth management industry:
Conclusion
The South African wealth management landscape is dynamic and clearly evolving. As the market continues to evolve, financial advisers continually need to adapt and innovate to meet the changing needs of their clients. By partnering with a DFM, embracing technology, focusing on client experience, and adhering to evolving regulations, they will be able to navigate the challenges and capitalise on the opportunities presented by this dynamic landscape.
Ultimately, the success of wealth management in South Africa will depend on the ability of advisers to provide trusted, personalised, and value-driven advice that empowers clients to achieve their financial goals.