Benefits and Challenges in Centralized Investment Decisions

Greater use of centralized portfolio management means advisers are under pressure to prove their value in other ways, such as offering financial wellness programs.

Given the pending Department of Labor (DOL) fiduciary rule and increasing litigation risk, there is a growing trend among retirement plan advisory practices to centralize oversight of investment lineup decisions at the home office, rather than to leave them to the discretion of the adviser.

“This is a very interesting time of disruption in the marketplace,” observes Shelby George, senior vice president of adviser services at Manning & Napier in Rochester, New York. “The question of whether advisers should outsource management of investments is the biggest issue that they are struggling with today. There is not necessarily a right or wrong answer.”

Steve Bogner, managing director of Hightower Treasury Partners in New York, also believes this is a growing development in the retirement planning industry: “There’s a growing trend among certain retirement advisory firms to assume greater control over how investment decisions are being made,” he says. “Companies that are taking greater control in this area are likely attempting to limit their exposure to potential liability issues [as well as] the future implementation of the DOL’s new rule.”

But Cerulli believes that many retirement plan advisers will resist this change, and Sean Hanlon, chief executive officer of Hanlon Investment Management in Egg Harbor Township, New Jersey, agrees, saying, “Giving up more control to the home office could marginalize the role of the adviser and limit flexibility of the solutions he or she can offer. Advisers are closest to the employer and the participant and know their particular needs. Advisers can customize solutions according to those needs [and] don’t want to be a pass-through, fulfilling documentation. They want to add value.”

NEXT: Clients in control of investment changes  

For those advisers whose companies are centralizing the investment function, they need to “focus on providing value in other areas, such as offering financial wellness and education programs, helping participants assess their retirement readiness goals, and evaluating and benchmarking service providers,” George says. “These are the helpful components that advisers can provide in lieu of investment advice.”

And these advisers may not need to obtain as many financial credentials as they have been, George says. However, others disagree, saying plan sponsors still place a high value on investment management credentials. “Designations such as the Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), Certified 401(k) Professional (C(k)P) and other industry designations will certainly continue to distinguish retirement plan advisers,” Bogner says.

Hanlon adds: “Despite less hands-on control, the sales process combined with increased litigation risk, and thus, errors and omissions cost, will likely drive firms to require more designations. Today, we see firms driving advisers towards designations like the Accredited Investment Fiduciary (AIF), and I would expect that to continue.”

Certainly, the CFA Institute recently announced that 31,631 candidates around the world sat for the Level III CFA Program exam, a 10% increase in candidates in the past year, and a 28% increase in candidates over the past five years. “The main motivation for advisers obtaining the Chartered Financial Analyst (CFA) designation is to signal to the marketplace that they are developing their competencies and intend to progress in their careers,” says Steve Horan, managing director of credentialing at the CFA Institute in Charlottesville, Virginia. And the retirement planning industry is “thirsty for ethics and starting to gravitate to a professional framework, like the legal and accounting industries,” he says. “The CFA program is a big part of that.” Even if investment oversight becomes more centralized at retirement advisory practices, Horan says, “you ultimately need advisers to develop the right strategy, and that is where demand for the charter will prevail.”