Home-office portfolios often outperform advisor-controlled ones, according to a Cerulli Associates report. Couple that with decreased compliance risk, and it’s likely the home-office model will become more prevalent in a post-DOL world.
“Firms are looking to decrease the number of firm relationships and products available because the more product variation, the greater the compliance risk to the firm,” said Onkita Ganguly, associate analyst at Cerulli.
From 2008 until now, however, the trend has been to go against the home-office model. A preference for reps as portfolio managers has prevailed largely due to the flexibility this model lends to advisors, who have been able to construct individualized portfolios for clients worried about protecting their assets following a market collapse. From 2011 to 2015, RPM programs more than doubled AUM from approximately $460 billion to $980 billion.
Cerulli anticipates that the DOL fiduciary rule will halt this growth in favor of home-office model programs, as sponsors look to conform to new standards.
Research suggests that minimizing compliance risk will not just change business models, impacting portfolio construction as well. Sponsors will look to reduce investment risk, lower fees and use passive investment vehicles, resulting in, as Tom O’Shea, associate director of Cerulli, notes, “clients owning very similar, cookie-cutter portfolios.”
Passive ETFs will be an important investment vehicle in the near future, with all advisors reporting a plan to increase ETF allocations. By 2018, 58 percent of ETFs used by advisors will be passive vehicles, 21 percent will be active and 20 percent will be strategic beta ETFs.
As portfolios become homogenized and advisors lose the ability to customize portfolios for individual clients, the role of the financial advisor will be more about relationship management.
O’Shea added, “In order to set themselves apart, financial consultants will have to focus on other higher-order investment advisory activities, especially goal-based planning.”