Advisor-Directed Account Performance Falls Short Compared to Packaged Programs
BOSTON, MA, August 30, 2012 -- Cerulli's latest research measures the performance of advisor-directed accounts compared to packaged programs, and finds that when the advisor is making the investment decisions, performance falls short. This raises the question whether clients should give advisors discretion to manage their portfolios.
"We estimate that packaged mutual fund advisory programs outperformed their advisor-managed peers in four of the eight quarters in 2010 and 2011. Controlling for flows over the period, packaged programs grew an average of 9.9% while open programs grew just 4.3%," comments Patrick Newcomb, lead analyst of this research.
Open mutual fund advisory (MFA) programs (advisor-managed) generally offered superior performance in quarters when markets were down the most, such as 2Q 2010 and 3Q 2011, as many advisors trimmed equity positions in those periods. However, the loss aversion experienced by clients in open programs can frequently be overcome by the disciplined market exposure of packaged programs such as occurred in 3Q 2010 and 4Q 2011 when packaged programs handily outperformed.
Though advisors want to remain in the center of client portfolio construction, evidence is mounting that this may not be the best scenario for investors.
"Asset managers should be prepared to assist sponsors in the promotion of packaged products and recommended lists. As these firms actively seek to limit the negative impact for investors, asset managers can position themselves as partners in this effort," continues Newcomb.
While performance alone suggests that clients may be ill-advised giving their advisors discretion, advisors clearly prefer these solutions. Discretionary advisory programs, which include both advisor-driven and home-office-driven programs, grew 52% during the past two years, compared to their nondiscretionary counterparts growing 28%.
While there are many factors driving advisors to use these programs, one of the main reasons is the scalability of these programs compared to nondiscretionary programs, where the client needs to give their consent on any manager changes or asset allocation shifts.
For broker/dealers (B/Ds), advisors having discretion and more decision-making flexibility brings with it compliance concerns.
"There are several options for B/Ds to address this trend of advisors moving into their more flexible managed account programs. These include stressing that packaged portfolios from the home office are constructed by experienced investment professionals, and introducing tactical portfolios managed by the home office, in which advisors and clients are less concerned about continually rebalancing a strategic portfolio in periods of market volatility," continues Newcomb.
Instead of showing advisors that their portfolios are underperforming the packaged portfolio, B/Ds plan to hold out the increased efficiency of these portfolios, enabling advisors to spend more time prospecting for new clients, growing their books of business, and interacting with their current clients more.
"Home-office teams at B/Ds are being very careful not to offend their advisors by pointing out their shortcomings, but they do hope to convince some of their advisors to use home-office- driven programs instead," concludes Newcomb.
About Cerulli Associates
Headquartered in Boston with offices in London and Singapore, Cerulli Associates provides financial institutions with guidance in strategic positioning and new business development. Our analysts blend industry knowledge, original research, and data analysis to bring perspective to current market conditions and forecasts for future developments.
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