Advisors, while experts in their clients’ eyes, may not be best suited to manage portfolios on their clients’ behalf, suggests new research from Cerulli Associates.
In the May issue of The Cerulli Edge – U.S. Edition, Cerulli looked at portfolios that are advisor-controlled compared to home-office packaged portfolios — and found that packaged portfolios frequently outperform their advisor-driven counterparts.
“When compared with portfolios that are advisor-controlled and client discretionary, packaged portfolios generate stronger returns,” Frederick Pickering, data analyst at Cerulli, said in a statement. “Cerulli believes this performance results from a combination of selecting superior managers and staying invested during market downturns and recoveries.”
According to Cerulli’s research, from the period 1Q 2010 – 4Q 2014, portfolios constructed by home-office teams outperformed those constructed by advisors and their clients. During this time period, $100,000 invested in a packaged home-office portfolio grew to $136,700, whereas a portfolio of the same amount with advisor involvement grew to $133,745 in a hybrid portfolio or $133,550 in an open portfolio.
Cerulli defines “packaged portfolios” as managed accounts that are put together by broker-dealer home offices. All decision-making responsibilities are relayed to central research committees, and advisors and clients do not have the ability to adjust asset allocations or change managers.
Meanwhile, advisors have more flexibility in what Cerulli calls “hybrid” and “open” portfolios. Hybrid offerings allow advisors to populate centrally provided allocation models with funds and managers drawn typically from a select list. With open portfolios, advisors have the greatest degree of flexibility in building fee-based portfolios for clients.
Cerulli’s latest research also finds that home-office packaged portfolios have experienced significant growth over the last 10 years.
Home-office packaged assets under management have expanded at a 22.8% compound annual growth rate between 2005 and 2015. These platforms offer scalable advice for small-balance accounts, which, according to Cerulli, drive their growth.
Cerulli alludes that some of this growth may also be due to the number of digital advice firms such as Betterment, FutureAdvisor (acquired by BlackRock) and Jemstep (acquired by Invesco) that are partnering with advisors to deliver packaged offerings to low-balance accounts in a scalable way.
These platforms are heavily packaged, with asset allocation happening at the home office and manager selection consisting of grading exchange-traded funds by various factors, such as cost, liquidity and tracking error.