Financial advisors each year are reducing their use of asset managers in building their clients' investment portfolios, according to a Cerulli Associates research report.
"Despite the proliferation of new products and providers, over the last several years, we've documented the extent to which advisors are using fewer asset managers,'' said Scott Smith, head of Cerulli's intermediary practice and lead author of Advisor Portfolio Construction Dynamics, a Cerulli report released Wednesday.
According to the report, an estimated 37% of advisors in 2005 reported regularly using five or fewer asset managers. By 2011, the numbers of advisors in that bracket had climbed to 57%.
Smith attributed several factors to the rising concentration of asset managers, including reducing costs and reducing asset management risk.
Smith said such cost savings are especially true with clients of insurance broker-dealers, and to a certain extent, independent broker-dealers and bank advisors, where people are paying commission loads.
"That is still a big deal in the regulatory community. For those advisors using commission products, they have to have a good reason not to pursue representation of a single firm," Smith said. "If that firm has solid offerings in the three or four asset classes that you need for a particular investor, then you'd better have a good reason not to do it, if you'd end up saving client money on the commissions by (using) a single manager."
Smith said some advisors also fear the risks of dealing with many providers because each new manager brings with him or her potential issues. For example, if a manager's name ends up in a negative headline, it could cause concern for clients, he said.
"You can call it headline risk--that has certainly contributed to it (using fewer asset managers)," Smith said. "If you believe in an advisor firm, and believe in their process, why wouldn't you use them for more than one asset class if they're among the top offerings."
Another factor contributing to advisors' use of fewer asset managers: growth in the use of exchange traded funds.
"A single manager can provide coverage of several asset classes within an ETF structure," Smith said. "While use of passive products has not pushed aside traditional active products, advisors are willing to consider them to address specific needs or to serve as complements to active products."
The report also says RIAs and banks are the most concentrated with a primary asset provider. "RIAs report an average of just more than 40% of assets with their primary provider, reflecting the high use of passive products and the existence of single-manager devotion prevalent in the channel," Smith said.
"In contrast, bank advisors are more likely to be implementing fund-of-funds solutions or operating in a commission environment where reducing sales charges by using a single manager is an ongoing concern," Smith added.