Advisers Aiming to Become Discretionary Portfolio Managers

Cerulli attributes this projected increase to advisers’ interest in building their role as discretionary portfolio managers. For many advisers, packaged programs may be the solution to improve efficiency and client performance, Cerulli contends in its 4Q 2011 issue of The Cerulli Edge: Advisor Edition.

The impact of advisers’ preference for discretionary programs has significant implications for broker/dealers, Cerulli says. “Firms must walk a fine line between extolling the virtues of a centralized services approach and respecting the autonomy of advisers to serve investors as they see fit,” comments Scott Smith, head of Cerulli’s intermediary practice.

From the broker/dealer perspective, adviser use of firm-driven investment solutions offers economies of scale both at the firm and practice levels and has the potential to reduce risk exposure on multiple levels, research has found. While advisers generally recognize that outsourcing portfolio construction activities could benefit their practices from an efficiency perspective, there is widespread reluctance among advisers to embrace this approach.

"Our research shows that advisers prefer the freedom of open programs over packaged solutions," comments Patrick Newcomb, senior analyst in Cerulli's managed accounts practice.

"The acceptance of packaged programs by advisers could ultimately be driven by the performance of the programs relative to the adviser's own results. Client management and portfolio management are often not intersecting skills, which would suggest consideration of firm discretionary solutions to focus efforts toward client services. Since advisers are subject to the psychological traps that reduce long-term investor returns, only process-oriented research-focused advisers should consider undertaking discretionary decisions," continues Newcomb.

The results of the limited analysis that has been conducted on advisers' ability to asset allocate has not reflected favorably on advisers' skills, found Cerulli. Though packaged equity programs suffered in 2008-2009 due to their largely fixed asset allocations, post-recession performance has been encouraging. Discipline paid off for advisers who remained in platform models throughout 2009 and 2010.

Cerulli's research shows that most providers charge higher expenses for participation in packaged programs, which is a concern for advisers as it means increased client costs or reduced compensation.

"Level fees for firm- and adviser-driven programs create a program-agnostic environment, while avoiding disincentives for the firm-driven packaged solution. While B/Ds may be reluctant to give up additional compensation that can come with packaged programs, they must weigh whether increased efficiency of advisers using firm-driven programs will outweigh the potential incremental revenues foregone under a levelized pricing scheme," concludes Smith.