DOL Fiduciary Rule
Department of Labor

The Coming Shakeout in Third-Party Asset Managers

Their hard-won shelf space will likely come up for review in 2017 as broker/dealers shift to a “less is more” approach.

Whether or not the Department of Labor’s fiduciary rule is implemented in its current form in April, major broker/dealers and other firms have begun a wholesale push to make their various platforms more transparent and streamlined, with an eye toward simplifying compliance with the rule and other regulations. And whereas firms saw little downside to adding third-party asset managers to their platforms in the past, they are now becoming increasingly aware that choice for the sake of choice is not always a good thing. TPAMs therefore should not be surprised to find their hard-won shelf space come up for review in 2017 as broker/dealers shift to a “less is more” approach.

In order to survive in this leaner environment, TPAMs will need to ensure that their offerings incorporate the following crucial characteristics:

1. A truly differentiated investment approach. In one of the most well-known studies of consumer behavior in America—the so-called “Jam Study”—two psychologists found that shoppers at a Bay-area grocery store were 10 times more likely to purchase one of the jams on display when the varieties of jam available were reduced from 24 to six.

This pattern should be familiar to any advisor who has tried to parse through the vast number of available TPAM offerings on their broker/dealer’s platform lately. Past a certain point, adding more options to the menu does not benefit the advisor; it simply places another burden on their time in order to figure out the differences in the various choices.

Going forward, TPAMs that are successful in defending their position on broker/dealer product platforms will be those that offer clearly differentiated investing approaches and results, not those whose portfolios boil down to minor variations on readily-available index funds, or a slightly different take on large cap growth.

2. Flexibility will be the name of the game. When it comes to investment disciplines, ‘clearly defined and differentiated’ does not mean ‘rigid.’ On the contrary, TPAMs’ ability to adapt to changes in the risk profiles of various securities, industries, and sectors of the economy will be another of the key features shared by successful third party managers in the years ahead.

For example, many managers adhere to asset allocation models with fixed ratios of stocks to bonds, despite clear indications that rates are likely to go higher. Sticking to outdated rules of thumb on the ‘correct’ proportion of equity to fixed income—regardless of obvious increases in the risk level of bonds—is a perfect illustration of the commoditized approach to portfolio management that may leave many TPAMs vulnerable in the years ahead.

3. Make use of technology to provide ‘mass personalization.’ The need for flexibility will extend beyond portfolio management discipline in the years ahead. The TPAMs that thrive will be those that are able to use technology to blend various portfolios on their platforms to craft customized investment solutions that meet the needs of individual clients—and do so on a scaleable basis. TPAMs that are effective in deploying technology to increase transparency and control costs will also have a significant edge.                                                             

While the success of the TPAM model has led to a proliferation of outsourced investment management options for broker/dealers and advisors, providers must reckon with a new trend in 2017, as firms across the industry shift their emphasis toward not just transparency but simplicity. By focusing on the key characteristics above, TPAM providers can position themselves as Ford or Daimler in the years ahead—rather than one of the hundreds of ‘me-too’ car companies from a century ago that are no longer in existence.

Greg Luken is founder and CEO of Luken Investment Analytics, a turnkey quantitative research and asset management firm. He can be reached at [email protected].

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