As broker-dealers drill down to decide which products and practices they can keep and which they have to eliminate from their platform (and their advisors’ practices) in order to meet the Securities and Exchange Commission’s new Regulation Best Interest rules, outsourcing investment management is becoming an increasingly attractive option.
Outsourced portfolio design and management provides an integral Reg BI risk-management tool for broker-dealers now faced with demonstrating careful risk management after decades of allowing their dually registered advisors to create and manage their own portfolios, securities attorneys and industry executives said.
“We’re continuing to see broker-dealers want to increase risk-management guard rails or parameters on rep-directed investment activities,” Jason Schwarz, president of Wilshire Funds Management and Wilshire Analytics, told Financial Advisor magazine.
“In the Reg BI environment, broker-dealers want to have the ability to reign in or impose a level of oversight on activities of financial advisors who are employing a rep-directed business model where advisors are building, designing and managing portfolios for clients on a one-on-one basis. Firms are increasingly finding this business model is creating a level of risk that is likely heightened in a Reg BI environment.
Wilshire, which provides consulting services and investment solutions to institutions and financial intermediaries, has experienced tremendous growth in the past three years since the Department of Labor created its fiduciary rule. While that rule was overturned in court, the DOL has announced it intends to issue a new proposal to dovetail with the SEC’s rule by year end.
“We’ve added over $30 billion in assets over the past several years driven by the fiduciary or best-interest trend, all in portfolios managed on behalf of financial advisors and driven by the first DOL fiduciary rule.” Schwarz said.
As of 2018, turnkey asset management platforms (TAMPs) were a $7.4 trillion market, but a confluence of industry trends -- regulatory scrutiny being one -- is boosting demand for outsourcing across the wealth management industry.
The continued focus on B-D and advisors’ duty of care and conflicts of interest will be a major driver of Wilshire’s growth in the B-D space, Schwarz said.
Risk management is driving more and more firms to outsource to firms that can provide scalable, institutional-quality investment portfolios and the higher level of risk management that comes from third-party due diligence and risk management, Schwarz added.
Outsourcing becomes even more important to broker-dealers' risk management when they offer proprietary products. Moving the overall portfolio selection and management to a third-party buffers any conflicts that may arise, attorneys said.