Industry News

More reps’ acting as PMs — but are they up to speed?

Morgan Stanley's Hatch says only about 10% of advisers currently have sufficient expertise in stock selection

The “representative as a portfolio manager” business is booming at Morgan Stanley Wealth Management —and it’s causing concerns about performance.

Advisers’ acting as portfolio managers, rather than outsourcing construction, has grown to $150 billion at Morgan Stanley, up from $17 billion in 2003, and is growing at a rate of $1 to $2 billion a month, according to Paul Hatch, vice chairman.

“It’s not temporary,” Mr. Hatch said of the trend at Morningstar Inc.’s ETF Invest Conference in Chicago. “It’s a permanent change. Advisers are taking more control and responsibility,” he said.

Mr. Hatch ultimately sees the change as a positive for the industry, since it’s turning a lot of advisers to fee-based compensation, which aligns their goals with those of clients. It also helps advisers guide clients toward their own specific goals.

“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.

All the positives of the “rep as a PM” model come with a big caveat, however. “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 only be 10% of advisers that are qualified to do it [stock selection] today. That’s not where it needs to be.”

To assist its advisers, Morgan Stanley rolled out new benchmarks this year to gauge how well each individual client is doing.

Morgan Stanley advisers who manage their own portfolios rate each client as conservative, moderate or aggressive. Their individual returns are then compared with all the other clients’ at the wirehouse in the same category, instead of a stock or bond index.

Advisers who are trailing their peers’ performance are targeted for more help, either through extra training or resources. 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, Mr. Hatch said.

“The move to having those decisions made by the adviser is a good thing,” he said. “But we have a long way to go to get the average adviser qualified.”