B-Ds see increase in use of offerings sponsored by firms

Adoption of fiduciary standard could inhibit brokers as portfolio managers, some say

Dec 5, 2010 @ 12:01 am

By Jessica Toonkel

First Allied Securities Inc., Janney Montgomery Scott LLC and Raymond James Financial Inc. are among a number of broker-dealers preparing for a spike in financial advisers' use of firm-sponsored, fee-based money management programs if brokers are to be held to a fiduciary standard of care.

Under the Dodd-Frank financial overhaul law, the Securities and Exchange Commission is conducting a six-month study for Congress about the differences in oversight of investment advisers and broker-dealers, and whether regulatory gaps exist. The study is due to be presented to Congress next month.

Assuming that something stricter than the current suitability standard is put in place for broker-dealer representatives, industry executives expect more advisers to move from acting as portfolio managers themselves to using their firms' discretionary programs, such as wrap programs, model portfolios and unified managed accounts.

Eighty-five percent of broker-dealers surveyed recently by Cerulli Associates Inc. said they think that if a universal fiduciary standard of care is imposed by the SEC, it will increase reps' use of firm-sponsored discretionary programs.

“Advisers are scared,” said Frank Campanale, chairman and chief executive of Advanced Equities Wealth Management Inc., the wealth management division of First Allied. “They are saying if I am going to be held responsible as a fiduciary, I better be damn sure I have some legs behind the decisions I am making.”

In many cases, broker-dealers — particularly smaller ones that don't have the technology to keep tabs on reps who act as portfolio managers — are already pushing brokers to use in-house model portfolios, executives said.

“Clearly, the industry has been headed in this direction for years,” said Jack Sharry, chief marketing officer of LifeYield LLC, a provider of tax optimization software. “The fiduciary standard just puts this trend on turbo.”

Getting advisers to move to firm-sponsored, fee-based money management programs won't be simple, however, observers said.

“There is going to be huge push-back, especially from the commission-based brokers who have been doing business this way for their entire careers,” said Len Reinhart, president of Reinhart Consulting Group. “All of a sudden, they will be told they can't do that anymore or that they have to get approval to buy a commission product.”

Broker-dealers also have to be careful to not come off as Big Brother when talking to advisers about using in-house models or they risk losing good portfolio managers, said Mark Elzweig, president of Mark Elzweig Co. Ltd., a recruiting firm.

“They are only going to be able to advance their case by persuasion, not compulsion,” he said.

Janney Montgomery doesn't want to force its commission-based brokers to use any of its nine sponsored or third-party portfolio programs. But at the same time, it wants advisers to understand that if they use those offerings, their lives will be easier if the fiduciary standard goes through, said David Penn, executive vice president and head of wealth management.


“We aren't forcing them to do anything, but we are trying to convince them that many should start changing [to a fee-based model],” he said. “We don't want to rule out commission-based business, but we don't know where this is going to land, so we are trying to educate advisers that here are some programs that you can use at Janney that can help you.”

Between 60% and 70% of the advisers at First Allied manage their clients' money themselves, but Mr. Campanale said he expects that percentage to decline as more advisers move to using firm-sponsored or third-party managed-money products.

“I expect it will equalize to 50% being portfolio managers and 50% using models,” he said.

But Mr. Campanale doesn't think that it is just the regulatory environment that is pushing this trend.

“Advisers are realizing that they aren't good at everything,” he said.

First Allied is focusing on providing more education and training for those advisers who want to continue serving as portfolio managers.

“Going forward, we are going to do more-intensive training for advisers on how you act as portfolio managers and how you manage the risk as a portfolio manager, because you have to execute those fiduciary responsibilities,” Mr. Campanale said.

Raymond James, like First Allied, is focused on helping advisers who want to continue acting as portfolio managers, as well as those who decide to adopt model portfolios, said chief operating officer Chet Helck, who heads the firm's private client group.

“The biggest thing I think we will see coming out of the regulatory reform is more disclosure,” he said.

Registered investment advisers who have been working under the fiduciary standard for years now likely will have to do more work to disclose their processes to clients, Mr. Helck said.

“Many advisers, regardless of whether they are acting as portfolio managers or not, are worried about the amount of paperwork they are going to need to do, which will increase their costs,” he said.

Raymond James has increased the amount of education and communications that it distributes to advisers about what they need to know regarding client disclosures.

“They need to describe not only the recommended portfolio mix they are advising but also explain the rationale for offering it,” Mr. Helck said.

E-mail Jessica Toonkel at jtoonkel@investmentnews.com.


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