Still dealing with the aftermath of the financial crisis, advisers are looking to meet the demands of investors by creating more cost-efficient or sophisticated portfolios that deliver clear outcomes. But wholesalers are still talking to advisers like their industry hasn't changed.
That's the conclusion of consultants who co-authored a study released Monday that calls on asset managers to serve the new ways that advisers build portfolios.
“Today many firms — I’d say the majority of firms — take what I’d say is a one-size-fits-all approach,” said Jeffrey A. Levi, a director at Casey Quirk & Associates and an author of the report. “They staff heavily and they segment the world based on asset size or channel or focus firm or some crude metric.”
The authors' logic is based on the idea that the advice business is undergoing a fundamental change.
First, the 2008-09 stock market rout rattled investors and has forced advisers to change the discussion around investments to one about outcomes, such as delivering clients certain levels of income or how much volatility is tolerable, rather than comparing performance to “style boxes” or market indexes like the S&P 500.
Second, the number of exotic investment options available to advisers has increased, allowing advisers to use outcome-oriented benchmarks and adjust portfolios to different market conditions.
Third, advisers and their firms are quickly moving to compensation based on fees rather than commissions, reducing the transactional nature of the advisers' relationship to their client but also increasing the complexity of the problems an adviser must address.
That all means that the traditional adviser, who builds portfolios using a few well-branded fund companies, is faced “with the choice to dedicate greater resources toward portfolio construction internally or look for methods to more efficiently assemble better portfolios,” according to the report.
This has led advisers to use four growing ways to approach the art of portfolio management, according to Casey Quirk. These new-style advisers include:
1. Portfolio managers, who build sophisticated portfolios with best-in-class managers and securities (representing 25% of advisers, the fastest-growing segment).
2. Passive allocators, who build simple, low-cost portfolios, primarily using index funds and ETFs (6%).
3. Multi-asset-class solution outsourcers, who use one product as the core of a portfolio and then select products to provide tactical market exposure (11%).
4. Home-office outsourcers who delegate portfolio allocation and manager selection to their firms (17%, the slowest-growing).
Those four groups account for six in 10 advisers today, a number that's growing, according to Casey Quirk.
But asset management firms are primarily geared toward serving the way advisers have traditionally approached portfolio construction. The consulting firm reckons only a third of advisers are still doing business that way. (The estimates are based on surveys and other research the firm has done with advisers, their firms and asset management companies, according to Mr. Levi, the consultant.)
Jason P. Soloman is one adviser who would be a tough sell for most large asset managers. The former hedge fund manager and broker now owns an independent advisory firm of his own. He said he’s worried about how bonds will perform going forward and won’t use “big-name” asset managers.
“I feel like they’re handcuffed and are not able to find solutions that are forward-thinking,” said Mr. Soloman, president of Tactical Investment Advisors in Cornelius, N.C. “I don’t believe that they have the ability or vision to control or navigate what’s coming down the pike and that scares me.”
Still, one executive responsible for quarterbacking a fund manager’s distribution efforts said the consultancy’s report’s conclusions are “ahead of schedule.”
“They’re paid to be provocative,” said Matthew J. Appelstein, head of distribution for The Royal Bank of Canada’s U.S. asset management unit, of Casey Quirk. “There’s time to react to the changes that are going to happen in the industry.”
But he said selling to advisers who work with retail clients requires increasing technical expertise.
“We call it the professional-buyer marketplace,” he said, noting that the firm trains wholesalers who work with institutional clients like pension funds the same as it trains wholesalers who call on retail firms like wirehouses or managed-account platforms.
“You can’t train people differently,” he said. “The marketplaces have really merged together.”
Casey Quirk’s report also placed special emphasis on the increasing influence of fee-based compensation.
“The rise of fee revenue made brand and multi-capability offerings less important in intermediary distribution,” the report said, turning to the standard of care required of fee-based advisers. “Additionally, fiduciary duty assumed in fee-based relationships calls for the best possible product, rather than reaping secondary advantages by concentrating positions with a single firm.”
By secondary advantages, the report alludes to the financial benefits, like fee waivers, often enjoyed by broker-dealers as a result of driving a large amount of assets to preferred fund companies.
The trends driving the way advisers now work will continue in the foreseeable future, according to Casey Quirk, which estimates that $745 billion will flow into fee-based programs by 2018, while $307 billion will leave commission-based arrangements over the same period.
Within those three years, advisers will increase by 23% their allocation to actively managed international stock funds as well as to alternatives such as real estate investment trusts and mutual funds that emulate strategies used by hedge-fund managers.
And seven in 10 advisers plan to increase their orientation to outcomes, compounding a trend that reached a climax as the 2008-09 stock market routed client portfolios.
As a result, fund managers need to revisit the way they approach advisers, the report argues. The intermediary market in the U.S., which includes the clients of brokers and advisers, hold $12.5 trillion in assets and account for 28% of global revenue for asset management firms.
And many of the same trends will apply equally to broker-dealer firms looking to increase the popularity of their managed-account platforms with advisers.