The “representative as portfolio manager” model is booming in the wirehouses for all the right reasons, but the pace of growth is also raising some concerns and challenges with regard to rep training and qualifications.
“The broker-dealers and wirehouses are letting advisers in the program, but there are some prerequisites and restrictions because it gives the advisers more flexibility [and discretion] with client portfolios,” said Patrick Newcomb, a senior analyst at Cerulli Associates Inc.
The rep-as-portfolio-manager program, which is called by different names at different firms, has been the fastest-growing wirehouse trend since the market downturn in 2008, “because the advisers like the flexibility,” he said.
In most programs, that flexibility means that reps have full discretion to invest client portfolio assets across a broad universe of stocks, bonds, mutual funds and exchange-traded funds.
To help ensure that financial advisers are up to the task, firms are introducing coursework and setting some minimum requirements related to experience and time with the firm, Mr. Newcomb said.
According to the latest data from the Money Management Institute, at the end of June, reps were managing portfolio assets of $456 billion in more than 1.2 million individual accounts, up from $403 billion and 1 million accounts at the start of the year.
At the end of 2008, during the peak of the financial crisis, there was $181 billion in 660,000 accounts.
“Since the financial crisis, financial advisers have begun to use rep-as-PM programs to create customized portfolios for clients,” said Jean Sullivan, managing principal at Dover Financial Research LLC.
“The reps like the greater flexibility in the program to access cash, as well as a wider variety of other products, including fixed income,” she said. “They can also design their own asset allocation model for clients.”
“This is a permanent change,” he said. “Advisers are taking more control and responsibility.”
With more than $150 billion in its rep-as-portfolio-manager program, Morgan Stanley is leading the way with a 33% share of the market, followed by Bank of America Merrill Lynch with $106 billion and a 23% share of the market, according to MMI data.
Beyond that, UBS Financial Services Inc. has $62 billion under management by reps, a 14% market share, followed by Wells Fargo & Co. with $49 billion and a 11% market share.
Jay Link, head of adviser-directed programs at Merrill Lynch, said that the growth of the rep-as-portfolio-manager program is closely monitored and scrutinized but not actively promoted.
“It's not a new program, and everyone knows about it, but it's growing as advisers run into other hurdles in their efforts to serve their clients well,” he said. “We support, certify and train advisers who show an interest, but we're really not actively promoting it.”
Like most firms offering such programs, Merrill Lynch introduces the reps to portfolio management gradually, based on their experience and abilities.
Once a rep has been approved for the program, “we require comprehensive training that includes everything from portfolio management to ethics, and security analysis,” Mr. Link said.
Mr. Hatch sees the trend toward greater use of reps as portfolio managers as a positive development for the industry because it is helping advisers transition to a fee-based model, from commissions.
“The closer the portfolio manager is to the client, the more likely the solution is going to be tied to the client's goals,” he said.
The caveat: “It assumes the adviser is qualified enough to be making [stock-picking] decisions,” Mr. Hatch said.
“The biggest challenge the industry faces today is asset allocation; advisers need to be qualified to do this,” he said. “There might be only 10% of advisers that are qualified to do [stock selection] today, and that's not where it needs to be.”
Scott Burns, director of fund research at Morningstar, agrees that the growth of the rep-as-portfolio-manager model is sustainable, but he acknowledges some of the unique challenges.
“It is a better business model because it correlates strongly with fee-based advisers, and it aligns the adviser's interest with investors',” he said. “But one of the real challenges is how the performance can be benchmarked.”
On the other hand, Mr. Burns said, a benchmark might not be necessary.
“If a client says, "These are my goals,' and you're helping a client to meet those goals, performance takes on a different kind of importance,” he said.
In order to assist its advisers, Morgan Stanley introduced benchmarks this year to help gauge how each client is doing, Mr. Hatch said.
Morgan Stanley advisers who manage their own portfolios rate each client as conservative, moderate or aggressive. Instead of being measured against a stock or bond index, their individual returns are compared with all other clients' in the same category.
Advisers who are trailing their peers' performance are targeted for extra help, either through training or resources, Mr. Hatch said.
They may even be pushed to outsource their investments and focus on the other areas of financial planning, such as relationship management, prospecting and tax planning.
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