The market for financial advice is experiencing “dramatic change” due to the Department of Labor conflict of interest rule, historically low yields on investments and the emergence of digital or “robo” advisors, according to new research.
Cerulli Associates unveils this finding in a new report, “U.S. Advisor Portfolio Construction 2016: Responding to fee pressure, regulations and passive investing.” The study examines trends in portfolio construction, detailing how financial advisors assemble and manage portfolios in light of client expectations and regulatory demands.
The report observes that the DOL’s conflict of interest (or fiduciary) rule has prompted advisors to give higher priority to reducing portfolio risk than to generating superior returns on investment. The rule will also restrict advisors’ latitude in the construction of client portfolios.
“Advisors highly value the flexibility found in rep-as-portfolio-manager (RPM) platforms, but the DOL rule will force broker/dealers to limit their firms’ risk profiles,” the report states. “And, as a result, they will seek to limit the discretion they allow advisors to take over client accounts.
“Distributors will seek to move advisors into home-office-created portfolios or RPM platforms that have strict guardrails,” the report adds. “Consequently, there will be a tug of war between advisors who want to maintain their autonomy and sponsors that want to lower their firm’s risk profile.”
Among the report’s additional highlights:
Advisors risk losing business to their digital/robo counterparts in catering to clients with low account minimums, notably individuals in the middle market.
Seven in 10 advisors polled by Cerulli agree that, amid continuing market volatility, asset managers of actively managed funds can reduce portfolio risk by offering “tactical trading,” or taking short-term equity positions in anticipation of market trends.
Asset managers should also strive to de-risk passively managed index funds by reducing exposure to “overpriced stocks” that make up much an index.
Products that incorporate socially responsible investment principles — ethically-conscious investment strategies that aim to achieve positive social change — have achieved mixed results to date. As a consequence, advisors and consumers are “unsure of the value” of these portfolio strategies.
Minimalist portfolios consisting of low-cost exchange-traded funds or ETFs have become an “important product strategy” for advisory firms catering to the middle market and mass-market investors. Key reasons: the portfolios’ simplicity and low fees.
“Some financial advisors fear that these digital portfolios may be too simplistic, leading clients to wonder whether the advisor is working hard for them,” says Cerulli Associate Director Tom O’Shea in a press statement. “Advisors should address this concern by offering higher order financial planning activities such as goals-based planning.”