In the past two years, broker directed rep as portfolio manager (Rep as PM) accounts have demonstrated impressive growth.   These are accounts in which the broker manages client monies that can be invested in stocks, mutual funds and ETFs. This can be done on a discretionary or non-discretionary basis.

Cerulli data show that the two-year growth rate for discretionary Rep as PM accounts was 82.3% and 74.6% for the non-discretionary Rep as Advisor.  There are $435.5 billion in the former and $516.8 billion in the later, according to Cerulli. I’ll refer to both accounts as “Rep as PM.”

In contrast, the separately managed accounts, or SMA, business was largely flat from 2009 to 2010, moving up to $615.5 billion by the end of 2011, an increase of only 31%. (There were $535.5 billion in SMA accounts in 2009.)

In a recent Aite study, 42% of respondents said that Broker as PM accounts will be the fastest growing fee-based format for clients with $250,000 to $10 million to invest.

Many brokerage-firm executives are ambivalent about this trend. They feel that only a select group of their advisors are skilled enough as investment experts to directly manage client assets and that most advisors primary strengths are in marketing and client service. They view raising and retaining assets as an advisor’s most productive and time efficient focus. Clients are best served with this model as well they proclaim.

Once market conditions get better and outside manager performance improves, these brokerage-firm executives predict that many advisors will abandon these programs and return to placing assets externally.  

Nonetheless, brokerage firms recognize the growing interest in these accounts and have made major investments in technology to support advisors who choose to do this business.  Merrill Lynch (BAC) for example, just rolled out its Portfolio+ platform to support its 3,800 advisors who manage $88 billion in a Rep as PM format.

In private, execs at asset-management firms express even more skepticism about the long term viability of this trend. How can advisors successfully compete against dedicated portfolio management teams that are supported by CFA-credentialed analysts they wonder?

Unlike advisors, an asset management firm’s investment teams can solely focus on managing money, free from the distractions of marketing and client service. Therefore, asset-management firms feel that they are far better equipped to produce superior investment returns. Most view Broker as PM accounts as a trend that will soften as markets improve.   

Nonetheless, a number of money-management firms have tweaked their wholesaling efforts to demonstrate to advisors how their firm’s offerings can complement an advisor’s Broker as PM portfolios.  

Rep as PM Trends

What’s behind the explosive growth of these programs and can it be sustained?  

There are a number of factors that have galvanized broker interest in these programs. First and foremost, the 2008 crash exposed the SMA’s relative lack of flexibility as compared to mutual funds, individual stocks and ETFs.  Often, it took a few days to sell stock positions and raise cash for anxious clients in gyrating markets.

Even worse, many advisors found themselves in the unenviable position of charging clients quarterly fees for underwater accounts. The oft-repeated mantra that third-party SMA business keeps the broker and client “on the same side of the table” proved (in many cases) to be little more than wishful thinking.

Didn’t anyone ever pay attention to the old adage that you can delegate authority but not responsibility?

In the aftermath of the market crash, some dissatisfied clients liquidated their SMA’s or even closed their accounts entirely.

The result of these traumatic events was that a wave of advisors stepped up and took direct control of client portfolios. They quickly moved client assets into Broker as PM programs. 

We find that advisors who are proficient at running client portfolios are pleased with these programs.  They report that Broker as PM programs put them right where they want to be-front and center in quarterbacking the client relationship. They reinforce the advisor’s unique brand.  In our experience, Broker As PM advisors are remarkably successful in retaining client assets and if necessary, transporting them to new firms. Clients are clear exactly who is responsible for their investment performance.

There are other benefits of Broker as PM programs. Advisors can give themselves a raise by not having to pay an outside manager, for example, 50 basis points to run the portfolio. Most important, advisors who want to be nimble in volatile markets can hold up to 30% cash in some of these accounts and still get paid.  In essence, cash is transformed into an asset class.

In short, while SMAs and other investment products surely have their place, many advisors will keep gravitating toward Broker as PM programs. They will continue to view these accounts as offering them an optimal combination of flexibility and control that is especially well suited to   today’s uncertain times and oscillating markets.