Home office investment performance beats advisers': study

Cerulli study suggests quantitative manager selection and staying invested during downturns helps home offices outperform advisers

Jun 8, 2015 @ 3:46 pm

By Trevor Hunnicutt

Home-office investment portfolios, often built by centralized units at brokerage firms, perform better than ones managed by financial advisers, according to a new analysis Monday.

Cerulli Associates found that portfolios built by home offices delivered 6.45% per year in the five years that ended Dec. 31, compared with the 5.99% delivered by the best group of accounts managed at least in part by advisers.

“We believe the outperformance is primarily driven by qualified home-office teams dedicating their time to asset allocation, manager selection and staying invested in the market during downturns,” said Cerulli analyst Frederick Pickering, in a statement accompanying the research results. “Home-office teams are more quantitative in their approach to manager selection and are not as swayed by qualitative factors such as a fund company's reputation or wholesaler relationships.”

The data comes as assets have exploded in fee-based managed account programs at large broker-dealers, with many of those programs giving some or all control to advisers to select funds and trade in and out of them.

Demand from clients to trade out of U.S. equity markets during the 2008 market rout contributed to their growth as have the rich fees commanded by wealth managers that offer the programs.


While some industry executives have argued that advisers should consider giving over control to home offices, especially when they have little time to research money managers, many are reluctant to do so.

Some advisers consciously manage portfolios in a way intended to limit losses, even at the expense of total returns. This study is one of few that attempts to quantify the cost of that choice.

The report found that adviser-led portfolios outperformed their “packaged” counterparts in two out of three quarters where those home-office portfolios delivered negative returns. In the third quarter, advisers and home offices tied. The down periods for packaged portfolios occurred in the third and fourth quarters of 2011 and the second quarter of 2012.

Yet despite the outperformance of advisers in the very worst quarters, their portfolios underperformed overall, which Cerulli attributed to their decision not to stay invested through the market's bottom. By staying invested, home offices could capture greatest gains, Cerulli said.

Not all industry executives agree that centrally managed portfolios work best. Paul Hatch, head of advice and solutions at UBS AG's Wealth Management Americas division, has argued that the increasing use of one popular adviser-managed program — called rep-as-PM — benefits investors by putting control in the hands of advisers better suited to meet the specific and often complex needs of their clients.


Rep-as-PM, which now represents more than a quarter of the money moving into the $4 trillion U.S. managed accounts industry, has also helped brokers transition more of their business to a fee-for-service model, in which clients directly foot the bill, as opposed to being paid commissions by product sponsors, Mr. Hatch has said.

In all, about half of the money in managed accounts is enrolled in discretionary advisory programs. About 29% is in nondiscretionary programs, with the rest in separate accounts, according to an earlier report by Cerulli, a Boston-based industry research firm.

The top managed-account programs are run by the largest U.S. wealth managers, Morgan Stanley Wealth Management, Bank of America Corp. and Wells Fargo Advisors. But the programs have been growing at the fastest clip elsewhere, at firms such as LPL Financial and Fidelity Investments, which serve independent advisers, according to the Money Management Institute, a trade group, and Dover Financial Research, a consultant.

Cerulli said its data, which cannot be independently verified, is based on “quarterly surveys of asset managers, broker-dealers and third-party vendors, which captures more than 95% of industry assets.”


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