Market Volatility Tests B/D Models

Recent market volatility will be a major test of broker/dealers’ home office-driven model portfolios, according to an upcoming report from consultant kasina.

The report, “Meeting the Needs of Tomorrow’s Distributors,” finds that although distributors want advisers to increase their usage of home office-driven models, adviser adoption of such models has decreased.

Despite advisers’ concerns about model portfolios, interviews with executives at all of the major broker/dealer firms highlight that distributors are looking to improve usage of models – expecting nearly a third (31.1%) of asset flows to come from these portfolios in the next 12 months.  Yet data from the Q2 2011 Benchmarking Survey by kasina’s FA Vision service reveals that the percentage of financial intermediaries who use home-office models has decreased from 67.1% to 61.6% in the last six months.

FA Vision found that intermediaries are skeptical of their home office decisions, with only 26.1% of financial intermediaries have “strong trust” in the home office as of Q2 2011, with a majority (63.9%) having low to moderate trust in the home office.

“Some advisers are reluctant to place greater assets in models because of distrust in the asset allocation or investment decisions made by home office research. An additional fear among advisers is that turnkey solutions like model portfolios diminish their value-proposition and inhibit the portfolio’s portability,” says Hari Krishnaswami, FA Vision Product Manager.

“The current market volatility will give advisers an opportunity to test the risk measures of home office-driven models in addition to how well these portfolios perform,” says Krishnaswami. “As distributors become more progressive and the centralization of investment decisions grow, we anticipate the overall fund flows controlled by the home office to grow, but they will need to perform well in volatile markets in order to gain advisors’ trust.”