Managed account assets are expected to grow to nearly $16 trillion by 2026, exceeding 13% annual growth over the next four years, but a new report suggests that, as sponsors balance growth in fee-based programs with portfolio oversight, the question of maintaining rep-as-portfolio-manager (RPM) programs is top-of-mind.
According to The Cerulli Report—U.S. Managed Accounts 2023: Decisions About Discretion, managed account sponsors are re-evaluating their RPM programs and coaxing advisors toward home-office discretion. Before reading any further, however, note that the findings are based on retail managed accounts and not DC plans. Managed account sponsors, as described in the report, are large broker/dealers and wirehouses with a fee-based advisory platform.
The percentage of sponsor firms with a formal process for removing discretion has ballooned to more than half (52%) in 2023, with an additional 16% considering this step. Moreover, more than a quarter (27%) of managed account sponsors are making modifications to their RPM programs to align them with their current business objectives, while another 15% are actively encouraging advisors to give up portfolio discretion.
Concerns over time and compliance are among the top reasons cited. According to the research, the belief that advisor time is better spent on other activities (69%) is the biggest concern sponsors have with RPM programs.
The Rationale
Cerulli notes that the rationale behind this is advisors who spend less time focused on portfolio construction will be more productive in other areas of their business; namely, bringing new clients to the firm, increasing assets under management, and growing productivity.
“Outsourcing to a home office or third-party solution can be beneficial to an advisor,” observes Cerulli Analyst Michael Manning. “The movement toward holistic financial planning or being a ‘lifetime financial coach’ inherently means less focus on individual security selection and more focus on creating a plan and making sure the client is on track. As more advisors embrace this philosophy, the need to act as a portfolio manager will become less important.”
A second concern sponsors expressed with RPM programs centers around compliance (66%), the report further shows. In considering compliance ramifications, sponsor executives are most concerned with consistent underperformance (82%).
To that end, Cerulli finds that advisor performance varied more widely than that of home office and client discretionary programs. Over three-, five-, and 10-year periods, advisory programs have the highest dispersion (average difference between best- and worst-performing programs each quarter).
That said, while home-office discretion portfolios consistently outperformed their client and advisor counterparts, the margins are relatively narrow, particularly over longer time horizons. For instance, the report shows that home office discretionary portfolios returned 4.45% over five years and 11.91% over 10 years, compared to 3.33% and 11.82%, respectively, for advisor-directed portfolios.
Straying from investment policy statements (76%) and lack of investment review (70%) are additional sponsor compliance concerns.
Core Tenet
Meanwhile, a large faction of advisors (nearly 60%) define portfolio construction and security selection as a core tenet of their business. While Cerulli believes the logic behind home-office outsourcing is strong, many sponsors will continue to support RPM programs for the foreseeable future.
In this case, Cerulli recommends that sponsors focus on revising advisor messaging and provide better portfolio construction support for advisors—a priority for 52% of sponsors.
Firms considering altering their RPM programs will need to effectively communicate this decision to clients and advisors to stem attrition, the report further advises.
“Sponsor firms may ultimately be better served modifying these programs to better fit with their overall strategy, and giving those advisors who want to take discretion better tools to be effective PMs than trying to remove advisor discretion entirely,” adds Manning. “Like the ‘death’ of the mutual fund, the march away from advisor discretion will be a long one,” he further emphasizes.
The report explores sponsor firms’ views on discretion and the steps they are taking to encourage advisors to outsource, as well as asset managers’ perspectives on discretion and the actions they are taking to better align with their distribution partners.
