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SSGA’s Rochte on Investment Discretion: What It Means for Advisor, Client Success

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A general session panel discussion took place n Wednesday at the Money Management Institute’s annual conference in Boston, hosted by Anthony Rochte, senior managing director and head of North American Intermediary Business Group for State Street Global Advisors.

Entitled “The Impact of Discretion on Advisory Solutions Business Models,” the discussion focused on how various advisors with differing business models managed their practices with regard to the issue of discretion. The panel of advisors represented the wirehouse, independent and RIA channels.

anthony rochte“There’s a big issue of trust (or lack of it) in the wake of the downturn, not only between clients and advisors, but between advisors and sponsors,” Rochte said. “Cerulli Associates found almost two-thirds of clients with assets north of $10 million have four advisors. It’s the reverse of the trend that was occurring prior to the downturn, which was consolidating assets to one advisor. The events of the past few years has them feeling like they need to spread it around again. OK, so how do you as the advisor become the quarterback, of the lead?”

Stephen Cucchiaro, founder and chief investment officer of Windhaven Investment Management, was the first panelist to speak. He noted clients buy when their comfortable (at the top of the market) and panic when they sell (at the bottom of the market), which is a reason advisors need discretion to mitigate against this poor behavior.

“When we think about the past two years, we had the largest market drop and largest rebound since the great depression,” he said. “They’ve been subjected to extreme volatility. Any scenario that involves an increase in risk has to be managed, and that includes so many aspects of the portfolio. It’s no more about simply throwing it all in tech, and the clients understand that.”

Mary Mullin, managing director of investments and wealth management advisor for Merrill Lynch Wealth Management, decried the speed at which market events currently happened, and she used separately managed accounts to help control that speed and volatility.

“Back in the old days, we researched a company, and maybe three months later, we decided to buy,” she said. “In that time, the price wouldn’t really move that much. Today, with CNBC, it happens so quickly.”

She rhetorically asked what advisors want to be? Between running the business, bringing in new business and meeting with clients, little time is left for much else. Is it better to outsource the money management? If so, how do advisors charge? Are they justified in charging the client the manager’s fee on top of their own fee?

“We were all worried about our own business and our own net worth during the economic crisis,” Mullin said. “This means we might have had biases as well. So I’ve seen a move to all-cap funds and asset allocation funds that are less volatile. The question with discretion becomes, ‘If this [crisis] happens again, will we have the time to call all of our clients and take appropriate action with each based on the conversations?’”

Hans Asoera, aprincipal and financial advisor with Edward Jones in Barre, Vt., noted that he does not have discretion from clients; it all takes place at the Edward Jones headquarters in St. Louis.

“My whole career has been focused on serving families and communities,” he said. “Because of the nature of my relationships with clients, I was able to keep them calm and invested throughout the downturn. For me it’s about managing the relationships, not the market.”

Because discretion is granted at the home office—but not advisor—level, Edward Jones clients understand that trades are being made on their behalf, but it’s up to the advisor to ensure the strategy to which the client agreed is being properly executed.