Broker-dealers are moving more toward having their home offices handle portfolio management and having reps concentrate more on dealing directly with clients, according to Cerulli Associates.
But the firm said in a new research report that broker-dealers still need to be sensitive to old-school brokers who resist the change.
Boston-based Cerulli Associates says in the report that 52% of broker-dealers now have a formal process in place for removing advisor discretion and another 16% are considering it. At the same time, 27% are modifying their rep-as-portfolio-manager (RPM) programs. And 15% are actively encouraging their RPMs to give up the portfolio management altogether, the research found.
“The metric we’ve seen that leads to the greatest client satisfaction, greatest advisor revenue, greatest client asset gathering, is talking to clients,” said Scott Smith, Cerulli’s director of advice relationships. “You’re not making yourself more money by rebalancing a portfolio or picking ETFs. So the firm wants more advisors spending more time talking to clients.”
In fact, 69% of broker-dealers are certain that advisor time is better spent on other activities, and finding that time means reducing time spent on portfolio management.
One data point that fully supports the broker-dealer metamorphosis is the underperformance of advisors compared to the home-office model, even though the margin is slight, according to Cerulli. In fact, 82% of broker-dealer decision makers said this was the primary concern for them, Cerulli found, followed by straying from investment policy statements, lack of investment review and compliance.
Over three-, five- and 10-year periods advisors had much more variance in performance, and home-office portfolios did better in every period, Cerulli said. Over three years, home offices returned 1.81% compared to advisor performance of 1%; over five years, 4.45% to 3.33%; and over 10 years 11.91% to 11.82%, the research said.
“The home offices in general are going to be more disciplined. They’re going to have a rules-based process,” Smith said. “Advisors are like all of us. They’re going to overreact to fear and greed. When the markets are going up, they’re not going to want to rebalance sometimes. If Facebook’s doing really well and it was originally 5% of the portfolio and it grows to 10%, they’re thinking, ‘It’s doing great! Maybe we don’t trim it to rebalance.’ Or if the markets go down, they take a bit more active approach sometimes.
“But the home office is going to say, ‘Nope, this is the recipe, we’re not going to change it.‘ They’re hard core and more reliable,” Smith continued. “If you can get greater client acquisition and slightly better performance, they both line up as things firms want to encourage.”
But a large number of brokers—nearly 60%—still identify their portfolio construction and security selection as what attracts their clients. Because of this, Cerulli recommended broker-dealers put more effort into making these brokers the best portfolio managers they can be.
Michael Manning, the associate analyst of managed accounts who conducted the research, said firms “obviously would prefer their advisors move to a home-office model where they can have more control and more predictable outcomes,” but that might be a big ask within the broker community.
“Sponsor firms may ultimately be better served modifying these programs to better fit with their overall strategy, and giving those advisors who want to take discretion better tools to be effective [portfolio managers] than trying to remove advisor discretion entirely,” he wrote in his research. “Like the ‘death’ of the mutual fund, the march away from advisor discretion will be a long one.”