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Scott Smith

The impact of advisors' preference for discretionary programs has significant implications for broker/dealers.

"Firms must walk a fine line between extolling the virtues of a centralized services approach and respecting the autonomy of advisors to serve investors as they see fit," comments Scott Smith, head of Cerulli's intermediary practice.

From the broker/dealer perspective, advisor 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. While advisors generally recognize that outsourcing portfolio construction activities could benefit their practices from an efficiency perspective, there is widespread reluctance among advisors to embrace this approach.

"Our research shows that advisors 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 advisors could ultimately be driven by the performance of the programs relative to the advisor'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 advisors are subject to the psychological traps that reduce long-term investor returns, only process-oriented research-focused advisors should consider undertaking discretionary decisions," continues Newcomb.

The results of the limited analysis that has been conducted on advisors' ability to asset allocate has not reflected favorably on advisors' skills. 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 advisors who remained in platform models throughout 2009 and 2010.

"Advisors have yet to embrace the programs en masse, as there has not been a marked shift back into packaged programs despite their superior comparative performance," continues Smith.

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

"Level fees for firm- and advisor-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 advisors using firm-driven programs will outweigh the potential incremental revenues foregone under a levelized pricing scheme," concludes Smith.

These findings and more are from The Cerulli Edge: Advisor Edition, 4Q 2011 issue.Source

Press release

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