Rep-as-Portfolio Manager Approach Keeps on Growing

The adviser-as-portfolio manager approach to client service can be a real differentiator, but it can also hamper a firm with significant liability and serious amounts of legwork. 

A new report from financial research and analytics firm Cerulli Associates explores the increasing popularity of “rep-as-portfolio-manager (RPM) programs,” through which advisers take a step beyond recommending asset allocations and general investment strategies to actually take full discretion over client assets.

According to the February 2016 U.S. Edition of The Cerulli Edge, an increasing number of advisers who have previously outsourced portfolio management to home office consulting groups or another third party are reasserting direct control of client accounts. The trend is especially prevalent looking back to 2008 and the financial crisis—a time that left many advisers and their clients feeling like they couldn’t execute decisions fast enough, in part due to crushing trade request volumes submitted to home offices.

The primary goal for advisers taking this path, Cerulli explains, is that it permits a more timely and nimble response to clients’ changing risk profiles, especially in a market setting marked by significant volatility. Tom O’Shea, associate director at Cerulli, observes that advisers widely view flexibility as the No. 1 reason for using RPM platforms, with more than 67% citing flexibility and control as the major factors.

One implication of the trend is that more than half of advisers plan to increase their use of managed account platforms that give them discretion over their clients’ allocation to mutual funds, exchange-traded funds (ETFs), and other investments. Cerulli’s research also finds the “changing landscape of investment discretion” is forcing asset managers to rethink their distribution strategies, especially adviser-mediated strategies.

Also important to note, the marketplace for RPM services seems to be converging around a two-pronged approach in which broker/dealers offer either full or partial discretion to advisers, depending on the investment research and due diligence bandwidth the adviser can bring to the table. “Discerning the type of RPM discretion an adviser exercises is critical to the wholesaler’s effectiveness in the field because it will point the salesperson toward the gatekeeper they need to influence,” O’Shea explains.

O’Shea further predicts asset management firms will start to “focus their attention on helping advisers understand how their products complement an adviser’s portfolio construction methodology … Advisers have graduated from selling products to building client solutions, and asset managers need to demonstrate what kind of building block their product is.”

Information about purchasing this and other Cerulli research is here.