It’s not a good idea to take “a hands-off approach” with financial advisors, Cerulli Associates researchers write in a newly-released study about managed account sponsors — a roster that includes, for proprietary separate accounts, Bank of America/Merrill Lynch, UBS, Wells Fargo, Fidelity Investments, and Janney Montgomery Scott.
By “hands-off,” the Cerulli researchers mean when the sponsors fail to monitor the FAs’ performance, or strip the advisors of their discretion if they underperform. Usually, the sponsors follow that problematic tack because they fear advisors may flee, the Cerulli researchers write.
It’s not an abstract problem, the Cerulli researchers found. Indeed, about one-fifth of the managed account sponsors decline to monitor participating FA’s “performance or take away discretion when advisors underperform because they fear advisors may leave the firm,” the report states.
But, notably, nearly all the firms in that one-fifth category are independent broker-dealers, not the big wirehouses, the Cerulli report concludes.
In contrast, most managed account sponsors require FAs “to meet certain requirements before they can exercise discretion over client accounts,” Cerulli researchers write. “Nearly 80% require some internal training and certification, while a sizable minority (42.9%) require outside qualifications, such as the CFP, CFA, or CIMA designations,” says Tom O’Shea, Cerulli’s director of managed accounts. “Sponsors also use tenure and assets under management to determine whether advisors can qualify to exercise discretion,” he adds.
On average, firms require advisors to accumulate 6.2 years of experience before they take discretion over client accounts. Sponsors also insist that advisors manage an average of $65 million before they can function in a rep-as-portfolio-manager (RPM) capacity, the Cerulli researchers report.
Most firms also train FAs on managing portfolios more effectively.
“Nearly two-thirds (64.3%) have programs to coach their advisors into becoming better portfolio managers,” the Cerulli researchers write.
“These coaching initiatives include teaching advisors to create investment policy statements, perform attribution analysis on their portfolios, build model portfolios, and trade in blocks of securities instead of picking stocks one by one,” says O’Shea.