Advisers Value Freedom in Portfolio Construction

This is because discretionary portfolios allow advisers to focus their efforts on value-added services, creating greater client satisfaction, rather than tracking down clients’ approval for trades, Cerulli noted.   

However, advisers also recognize the value of assistance in the portfolio construction process. While many are unwilling to fully outsource, a majority of advisers cite using their firms’ suggested model portfolios as an element of their portfolio construction processes.   

“Advisers generally understand the potential advantages of packaged managed account programs, but have hesitations about cost, control, and portability, which prevent them from fully embracing these programs. Conversely, from the broker/dealers’ perspective, packaged programs provide the largest revenue opportunities, compliance benefits, and due diligence scalability,” said Scott Smith, head of Cerulli’s intermediary practice and author of the report “Advisor Portfolio Construction Dynamics.”

The research found that open managed account programs, which allow advisers to implement firm recommendations when there is consensus and override firm recommendations when strategies diverge, are advisers’ managed account program of choice. According to Cerulli’s research, more than 55% of advisers view these open programs as most desirable. Additionally, these programs account for 56% of managed accounts market share.   

“From the broker/dealers’ perspective, however, this flexibility makes open programs an ongoing challenge with regard to compliance oversight.  Despite this, open programs are critical to recruitment and retention of top-producing adviser teams that believe their internal processes create beneficial outcomes for clients,” Smith commented.   

B/Ds are largely doing their best to supply advisers with support systems and processes to increase the chances of improved investor outcomes, but firms must tread lightly or risk impinging upon the independence of their adviser forces. Though there are outliers on either end of the spectrum, advisers largely recognize that they are not the world’s foremost experts on portfolio construction, and appreciate some help with the process, the press release noted.    

For asset managers, it’s important to note that 60% to 75% of all platform assets are influenced by home-office suggestions. “These types of flows should be driving asset managers to compete aggressively for placement on broker/dealer recommended lists,” concludes Smith.