Is there a business case for outsourcing?
New research from global research and consulting firm Cerulli Associates focuses on the benefits that advisors attain when they outsource and rely on model portfolios in their practices.
“The Department of Labor’s Conflict of Interest Rule has raised standards for investment due diligence and documentation; consequently, advisors making their own investment decisions increases potential liability for broker-dealers,” Kenton Shirk, director of Cerulli’s U.S. Intermediary practice, said in a press release. “In response to this growing concern of liability, [broker-dealers] seek to refocus advisors on home-office discretionary programs.”
According to research from Cerulli, advisors underperform home-office programs. Between the first quarter of 2010 and the fourth quarter of 2016, home-office-packaged portfolios delivered an average annual return of 5.19%, compared with 3.70% for advisor-created portfolios.
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As a result, BDs want to refocus advisors on home-office discretionary programs that give more control to home offices’ research teams. Asset managers are responding by adjusting distribution strategies to reflect the growing influence of professional buyers.
Both BDs and asset managers need to understand the advisor’s requirements and objectives if they want to identify and influence portfolio construction behaviors.
As part of its research, Cerulli compared the portfolio construction process for advisors affiliated with wirehouses, independent broker-dealers (IBDs) and independent registered investment advisors (RIAs).
“Use of model portfolios is prevalent across all three channels with at least 74% of advisors using either practice models or outsourced models,” Shirk said.
Practice model users are those who rely on model portfolios created from scratch by advisors, a chief investment officer, or analysts employed within the practice, and these advisors insource investment decisions. Whereas advisors who primarily use outsourced models rely on model portfolios built by a BD home office or other third party, and these advisors outsource investment decisions.