Financial advisors will increase their discretionary business over the next year despite the fact that prepackaged asset allocation programs frequently perform better, according to Cerulli Associates.
Advisors pride themselves on dealing with clients' assets rather than relying on packaged programs, according to Cerulli. Because of that, advisors are expected to increase the percentage of their business that is discretionary from 59% this year to 71% by 2013, Cerulli said in the fourth-quarter issue of The Cerulli Edge: Advisor Edition.
This is in spite of the fact that prepackaged programs frequently out-perform advisor selected investments. However, packaged programs took a hit during the 2008 recession, mostly because of their fixed nature, Cerulli said, adding that advisors have not returned to them since.
"Our research shows that advisors prefer the freedom of open programs over packaged solutions," said Patrick Newcomb, senior analyst in Cerulli's managed accounts practice. But the impact of advisors' preferences for discretionary programs has significant implications for broker/dealers, according to Cerulli.
The limited analysis that has been done on advisors' ability to allocate assets shows that packaged programs often perform better, according to Cerulli.
"Though packaged equity programs suffered in 2008-2009 due to their largely fixed asset allocations, post-recession performance has been encouraging," said Cerulli, adding that discipline paid off for advisors who remained in platform models throughout 2009 and 2010.
The research concludes that managing clients and managing portfolios may be two different skill sets and firms should focus on client services.
At the same time, "firms must walk a fine line between extolling the virtues of a centralized services approach and respecting the autonomy of advisors to serve investors as they see fit," said Scott Smith, head of Cerulli's intermediary practice.