New Report Says FAs Reassessing Business Model

A new report suggests that more financial advisers (FAs) at the national broker/dealers (B/Ds) are reluctant to follow home office model portfolio recommendations. 

Instead, they have become more engaged in portfolio construction and more interested in discretionary account management, according to a report from Strategic Insight, an Asset International company. 

The SI report notes that “action breeds confidence,” and that the “partly passive nature of outsourcing investment management through home office models eliminates some of the FA’s psychological benefits of being ‘in control’ of a client’s investment portfolio.”  Additionally, the compensation to the FA associated with managing discretionary accounts can be slightly higher than for nondiscretionary accounts.  That said, “with increasing presence of ‘Reps as PMs’ (including, for example, the highest selling platform in the Morgan Stanley Smith Barney system lately), opportunities for fund wholesalers to influence such FA choices are expanding,” according to the report. 

Path Towards Fiduciary Standards 

This trend toward discretionary account management, which is typical for many registered investment advisers (RIAs),  but less so among FAs at national B/Ds, may accelerate as the path towards “fiduciary” standards becomes clearer. The SI analysis indicates that with such a standard, some advisers may shift even more to “fee-based, vehicle-agnostic home office models,” ostensibly for better time management and for shifting responsibility for results away from themselves.  That said, the SI report acknowledges that other FAs might prefer moving forward with the customization benefits of a fee-based discretionary approach as a way to address fiduciary standards.  

SI notes that the role of mutual fund wholesalers remains very significant, citing the fact that, at Merrill Lynch, “85% of flows lately were in platforms where the FA makes the decision,” while just 15% were based on home office determination (according to a senior Merrill Lynch executive presenting at a recent SI conference).  

Additional Education

Of course, with the added responsibilities that come with discretion over a client’s portfolio, FAs need not only deeper product knowledge from wholesalers but also portfolio construction guidance, education and training, according to the analysis.  

As part of their response to what it characterized as the “bubbly” demand for bonds and bond funds today, SI notes that some B/Ds have launched programs and road shows to encourage advisers to make client recommendation beyond just “searching for yields higher than cash.” These programs emphasize FA need/obligation to focus on investors’ future portfolio underfunding risk, and thus the need for equity allocations.  SI says that that education has advocated bond fund credit exposure over interest rate exposure, and globally, emerging markets allocations over developed capital markets.

More information about the report is available at