Underperforming Advisors Pose Risk, but Some Managed Account Sponsors Won’t Interfere

October 2019, BOSTON – With advisors seeking to extend their discretionary control over accounts, managed account sponsors are becoming concerned that advisors who underperform introduce litigation risk that can damage the company’s brand and reputation. However, research from Cerulli Associates, a global research and consulting firm, concludes that one-fifth of managed account sponsors take a hands-off approach to advisors, declining to monitor their performance or take away discretion when advisors underperform because they fear advisors may leave the firm. Nearly all the firms in this category are independent broker/dealers.

In contrast to this cohort of hands-off firms, most managed account sponsors require advisors to meet certain requirements before they can exercise discretion over client accounts. “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, director of managed accounts at Cerulli. “Sponsors also use tenure and assets under management to determine whether advisors can qualify to exercise discretion.” 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.

To boost performance, most firms prefer to train advisors on managing portfolios more effectively. Nearly two-thirds (64.3%) have programs to coach their advisors into becoming better portfolio managers. O’Shea explains, “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.”

For asset managers, the opportunity to help sponsors educate and advise advisors to strengthen portfolio construction through model portfolios is immense. More than one-third (35.7%) of sponsors encourage underperforming advisors to use home-office-created asset allocation models, and 28.6% guide advisors in the direction of asset allocation models created by third-party strategists.

O’Shea concludes, “The managed account sponsors that prefer to take a hands-off approach with their advisors should follow the direction of those managed account sponsors that track advisor performance and offer coaching to underperforming advisors.” Firms that have implemented this approach have found advisors to be very receptive.

The 3Q 2019 issue of The Cerulli Edge—U.S. Managed Accounts Edition explores managed account sponsors’ attempts to coach advisors whose client portfolios underperform, as well as the growth opportunity presented by smaller advisors.