Research Expertise Can Boost Practice Performance

There are various reasons why advisers choose to hire on-staff research analysts and chief investment officers, says Kenton Shirk, associate director at Cerulli Associates, but many firms cite significant positive benefits after adding internal expertise.

The use of dedicated internal research and portfolio management staffers is examined in the third-quarter 2015 issue of “The Cerulli Edge – Advisor Edition.” The analysis finds that as practices seek to build scale, they increasingly turn to centralization to boost efficiency. This leads to greater specialization of roles, Shirk explains, especially across the sales management, investment research and client service functions.

Most commonly, growing advisory teams move to “institutionalize their investment management processes,” Cerulli says. This allows firms to create and maintain a consistent sales and client service framework across increasingly large networks of clients and advisers.

Shirk notes this structure can also boost productivity, “given that, on average, 17% of an adviser’s time is spent on activities related to investment management.” He says advisory firm leadership and sales staff can redirect their time to client-facing activities if they centralize or outsource recurring tasks, such as conducting asset manager due diligence, rebalancing portfolios and monitoring investments.

Centralization won’t proceed the same way for all firms. Shirk says there are “many permutations of research team roles and structures.” He cites the example of a smaller practice that brings on a junior analyst to do basic investment screening and monitoring. ”Or a practice could employ a formalized chief investment officer (CIO) position overseeing multiple analysts with responsibility for covering specific asset classes.”

Findings from the Cerulli report are directed at fund providers and third-party asset managers, but the takeaways are important for advisory practices as well. Cerulli suggests fund providers and asset managers are targeting internal research staffers and investment experts as key centers of influence over end-investor dollars. Cerulli warns that for asset managers, it is critical to understand how advisory practices make investment decisions and the degree to which various parties influence those decisions.

NEXT: Getting the most from internal analysts 

Cerulli’s analysis finds 41% of practices with greater than $500 million in assets employ at least one research analyst. “This compares to only 23% of practices with $250 million to $500 million, 21% of practices with $100 to $250 million, and 8% of practices with $50 to $100 million,” the report explains.

Several advisers are quoted anonymously in the report, speaking frankly about their trust (or not) in various sources of research. One “lead adviser at a large independent broker/dealer practice” said his firm generally has more conviction in the recommendations it is giving to clients when they come from the internal research team.

“We always want to be able to explain to our clients the rationale for each decision,” that adviser said.

On the flip side, some advisors expressed to Cerulli concerns about the quality of research offerings provided by their home offices. In one case, an adviser team that employs a CIO and manages a formal investment committee told Cerulli that they have historically ignored internal research because they thought they found better investment themes and options themselves.

“A national sales manager at an asset management firm told Cerulli that they’ve heard from advisers who are apprehensive about recommended lists getting stale,” the report notes. “While B/Ds are likely to communicate changes made to their lists, there is also a need to reinforce that current recommendations are constantly being reviewed—ensuring ongoing communications about even those investments that have remained steadily on the list for long periods of time.”

One interesting model shared with Cerulli involved a team that employs two directors of investments—one who covers equities and another who covers fixed income.

“The research team builds model portfolios and advisers have the ability to personalize models based on individual client needs,” Cerulli explains. “They have scale and discretion, and they systematize conversations with clients after changes are implemented. These firms start to look a little more like asset management companies.”

Information on obtaining Cerulli research reports is here.