In Practice December 20, 2009

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. 

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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. 

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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 http://www.sionline.com/published/2009-whitepapers/main.asp

In Practice December 18, 2009

Retirement Plan Advisers Boast Bigger Books of Business

Advisers with retirement plan sponsor clients have total assets under management (AUM) more than 40% higher than their peers, according to Cogent Research.

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The research firm said advisers who sell and manage workplace retirement plans manage $92 million in assets (on average), compared to the $65 million book of the average non-retirement-plan producer.

That might come as no surprise because retirement plans are generally much larger than the average individual wealth client—but Cogent claimed retirement plan advisers are still more successful than their peers without the plans. It turns out that even when excluding plan dollars, retirement plan advisers still outdo their peers by 25%, or $16.3 million in AUM, on average.

Cogent’s Carrie Merrick, who authored the report detailing the findings, said those results are a reflection of a generally more sophisticated subgroup of advisers. “These advisers have figured out that managing retirement plan assets grants them access to the non-qualified dollars of senior-level planholders and sponsors, which are oftentimes substantial,” Merrick said in the release of the results.

The retirement plan advisory space will continue to grow over the next two years, as almost one out of every three advisers intends to add plan assets, whether entering into the market for the first or adding to their existing retirement plans, according to Cogent. Among the more than half (55%) of retail advisers who sell and support employer-sponsored retirement plans, 43% expect to increase their retirement plan business in the future (24% of all advisers). Six percent of advisers plan to enter the retirement plan space within that timeframe.

Cogent surveyed 363 retirement plan advisers (advisers who manage at least one employer-sponsored retirement plan).

More information about purchasing the report “Success at Work: Capturing Advisor-Sold Retirement Plan Dollars” is available at www.cogentresearch.com.

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