Practice Management

More Advisers May Be Forced to Use Model Portfolios

Most executives interviewed by Cerulli believe that home-office discretion will increase as “underperforming advisers are identified and persuaded to use portfolios created by the headquarters consulting group.”

By John Manganaro | August 02, 2017
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The latest research from Cerulli Associates suggests most executives in the advisory industry believe that home-office discretion over clients' investment exposures will increase significantly under the Department of Labor (DOL) fiduciary rule and other competitive pressures.

Tom O'Shea, associate director at Cerulli, explains a big part of the trend comes from the fact that home office leaders, tasked with meeting new fiduciary compliance standards across potentially large groups of staffers in the field, are increasingly desperate to boost control of and visibility into day-to-day practice operations. In addition, they can now leverage new tools and strategies allowing firms to clearly identify underperforming or non-process-compliant advisers, “who can then be persuaded to use portfolios created by the headquarters consulting group.”

“The DOL conflict of interest rule poses risk to a firm if [practice leaders] knowingly allow advisers to manage underperforming portfolios for clients when a better-performing portfolio with a similar risk level is available from the home office,” O’Shea warns. "As firms add compliance and monitoring capabilities to their rep-as-portfolio manager platforms, they are finding that [some] advisers do a poor job of steering client assets.”

Cerulli concludes that “more than two-thirds of advisers rely on themselves or their practice to help them with portfolio models. Only a minority of advisers look outside their practice for input.”

“Advisers typically look for ideas from their own adviser team rather than a home-office or a third-party strategist,” O’Shea clarifies. “Many advisers are emotionally invested in managing their clients' portfolios and will resist their firms' coaxing to use third-party models.”

This is only natural, O’Shea feels, “because they have worked hard to acquire certifications such as the CIMA, CFA, or CFP designations. Asking them to outsource portfolio construction and management to a third party is tantamount to questioning their purpose in life.” However, it is clear that clients themselves increasingly expect the adviser to take on a fundamentally different role than in the past—one that is less about picking stocks and bonds and more about setting/monitoring objectives and protecting outcomes.

The conclusion of the report is that “working smarter, not harder, can be elusive for many advisers … Training and outsourcing may bring productivity, and ultimately, revenue generation, up a notch.”

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