As the industry embraces a fiduciary duty, the widely used rep-as-portfolio manager programs at broker-dealers will be under scrutiny—and for good reason.
The programs let advisors run their own model portfolios with varying amounts of discretion.
But pockets of underperformance and the wide dispersion of results continue to plague the programs, B-D execs were told Tuesday at the Financial Services Institute annual meeting in San Francisco.
At the same time, firms are facing pressure from regulators and from consumers to better understand how rep-as-portfolio manager (RPM) programs work, according to speakers at the conference.
As a result, brokerage firms need to dig in and find out exactly how their reps are doing with the portfolios they manage themselves.
George Chuang, president of Transamerica Financial Advisors, presented results of a study the firm did of its RPM accounts from 2013. The review looked at the performance and dispersion among model portfolios, and compared advisors’ results to two internally managed models.
Advisors underperformed internal models by 100 to 200 basis points, Chuang said, and the underperformance was higher in higher-risk portfolios.
“Advisors were not spreading their risk and doing their portfolios correctly,” Chuang said.
The greatest dispersion in performance was among smaller accounts, which Chuang said was likely due to the advisors’ failure to rebalance and keep in contact regularly.
“If you’re a fiduciary today, that $50,000 account should perform just as well as that $500,000 account,” he said.
Transamerica no longer offers an RPM platform, instead using internal models and TAMP programs.
“If you’re going to support rep-as-portfolio manager, you have to be careful, because when you look under the rocks, this is what you’re going to find,” agreed Michael Bryan, chief executive at Triad Hybrid Solutions.