Post-Downturn Changes Seen in FA Portfolio Construction

That was one conclusion by SI researcher Dennis Bowden, in his study “Financial Advisors In Transition: Establishing Relationships With High-Producing Advisors,” looking at data contained in Coates Analytics’ Distribution Management System to focus on a large selection of high-producing national broker-dealer FAs who transitioned new business toward the commission-based platform structure in 2009. SI is an Asset International company.

According to Bowden, increased demand for Long/Short Equity, Specialty Equity and Emerging Markets Equity funds indicates investors’ and advisers’ desire for strategies providing lower correlation to traditional equity markets.

Also, the SI researcher asserted, demand for these strategies also is a further reflection of the increased reliance being placed on trusted asset managers (and individual funds) to navigate more diverse cross-sections of investors’ asset allocation portfolios – given the flexibility embedded within Long/Short Equity funds to navigate both positive and negative price movements.

“These moves beyond the style box, against the backdrop of increased investor caution regarding traditional long-only equity investments, suggest that FAs transitioning business back toward wrap programs during Q1’10 may be taking a new fundamental approach to constructing the “core” of their clients’ asset allocation portfolios,” Bowden wrote in the report.

According to the study, as the advisers moved back toward wrap platforms during Q1’10, the types of fund sales in evidence point to the use of more open-architecture platform structures, where the investment selection decisions are made by the FA and investor . Bowden contended that the greater reliance on more broadly mandated single funds to compose the core of asset allocation portfolios runs contrary to most home-office model-based asset allocation programs, “where much of the value comes in the identification, combination and ongoing monitoring of many unique, narrowly-mandated individual investment strategies.”

Given the concern about high correlation between many traditional, narrowly-mandated equity strategies during times of market duress (as seen in late 2008 and early 2009), this increasing demand for more flexibly mandated Global Equity funds may be reflective of these high-producing FAs’ desire to “outsource” a larger portion of the global diversification and allocation decisions of their clients’ equity exposure to asset managers within a single fund structure, SI said.

Commission Sales Trend Temporary?

In other issues, the SI report found that the post-financial crisis market environment has seen an increase in sales via commission-based platforms among national broker-dealer (NBD) financial advisers (FAs), but that the trend may be temporary for many advisers.

Bond-fund demand drew certain FAs to greater use of commission-based programs in 2009. Among a peer group of 1,032 high-producing NBD advisors who had 50%-75% of their total mutual fund sales go to commission-based platforms during 2009, one-half relied on commission-based platforms for less than 50% of their sales in 2008.

SI said that during the short window of improved retail investor sentiment toward equity funds in Q1’2010, the FAs within the peer group increased their average share of sales to mutual fund wrap platforms to 44% – a 6% increase over 2009’s average of 38% and back toward their average 2008 business mix of 51%.

Increased use of mutual fund wrap programs among our FA peer group during Q1’2010 went hand-in-hand with a significant rise in average sales to US Equity and International/Global Equity funds within wraps.

SI said that none of the three US Large Cap Equity investment styles (Value, Core, Blend) experienced rebounding demand during Q1. Conversely, Global Equity, Specialty Equity and Long/Short Equity were among the categories leading equity sales within wrap programs among these FAs.

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