Unlock Your Access for the Data Webinar: Winning Data Teams: Getting Started and Scaling Your Team aired November 15, 2022

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
— Warren Buffett, Chairman and CEO of Berkshire Hathaway

Warren Buffett is probably the best known investor on the planet and the high priest of the buy-and-hold strategy. He told the Wall Street Journal that his favorite holding period for an investment is “forever.”

Financial advisors that manage their own portfolios apparently have not been following the Oracle of Omaha’s advice. According to a recent Cerulli report, over the past five years, portfolios managed directly by advisors have underperformed those managed by home offices by whopping 3.15%.  Cerulli attributed these results to home offices remaining invested throughout the financial crisis as well as better investment selection.

This underperformance did not surprise Andrew Klausner, Founder and Principal, AK Advisory Partners LLC, since he believes that “many of the advisors managing these portfolios are not really true portfolio managers”.

In spite of their performance relative to home offices, assets have flowed into the RPM segment at an ever increasing rate since 2008.  RPM assets grew by 22% in 2014 to $921.8 billion, Cerulli reported.

“While this has been the fasted growing segment of the fee-based business, I have always been very leery of it,” Klausner insisted.  RPM advisors tend to act more like clients than money managers in down markets, he explained.  They are quick to go to cash and then slow to get back into the market and miss the upturn. (See Rep as PM: The Inside Scoop)

A recent survey done by WealthManagement.com reported that 59% of advisors said the biggest benefit of an RPM program was increased ability to customize asset allocation choices, while 57% said it allows them to be more nimble when responding to market changes.  Both of these options would have contributed to the lower performance of advisor-directed portfolios.

Advisor-Managed PortfoliosHome Office Oversight

When broken down by channel, portfolios managed by wirehouse advisors performed better than those run by advisors at independent broker-dealers (IBD’s), Cerulli said. They believe this was due to the wirehouses offering more support and conducting more oversight of their advisors’ portfolios.

Oversight is just one of the reason that home offices are looking to create much more consistency in how their advisors deliver advice, explained Gavin Spitzner, Founder and President at Wealth Consulting Partners, LLC.  Other reasons include compliance/regulatory pressure, a desire to drive their best portfolios and their strong belief that advisors should focus on asset gathering and a goals-based wealth management approach rather than trying to act as asset managers.

Advisor Profitability

Many advisors are struggling with this redefinition of their value proposition and role in this new paradigm, Spitzner observed.  However, advisors who outsource investment management have faster-growing, more profitable practices, as confirmed by a multitude of research studies, he stated.advisor-managed portfolios

This recommendation was seconded by Brandon Rembe, SVP, Product Development, Envestnet who reported that their research showed that advisors with higher investment returns are slightly less profitable and have fewer clients. This is due to the extra time they must spend selecting investments, which takes away from client servicing, prospecting and other activities, he noted.

This information has apparently not reached advisors yet, since Cerulli projects that RPM assets will continue to enjoy double-digit growth rates, climbing to $1.8 trillion at the end of 2018.

The trend towards RPM programs could be seen starting as far back as 2011, when the Aite Group reported that almost 60% of advisors, across all industry segments, had expressed a strong preference for advisor-directed asset management.  RPM programs held just 27% of fee-based assets at the time.

As firms rationalize and integrate their fee-based platform offerings over the next 2-3 years, Spitzner predicts that firms will continue to nudge advisors towards home office models.  But they will offer a migration path for RPM-oriented advisors by allowing them to manage sleeves, with guardrails, within an overall unified managed account (UMA) framework.  “This is a win-win for advisors, sponsor organizations and ultimately end clients, who should benefit from a more unified and coordinated portfolio,” he stated. (See One Platform To Rule Them All: How Consolidation Transforms Wealth Management Systems)

Advisor-Managed Portfolios

As a technology and strategy consultant to the industry, I have helped vendors build RPM platforms and have also helped broker-dealers and RIA’s to select platforms as well as implement them.  Since I am not a fiduciary, it is not up to me to decide which managed accounts program is best for their clients.  However, I will make sure that my clients are aware of this performance data so that they can make informed decisions on how best to design their programs.

Related WM Today Content
In|Vest 2015 Conference: Fast Twitter Recap – Day 1
How Risk Tolerance Software Is Disrupting Wealth Management
Can Client-Directed UMA’s Help Defend Against Robo-Advisors?

2 Responses

  1. John,

    You’ll have to purchase the Cerulli report to get that data. That’s how they make their money!


  2. Hello Craig,

    Although a well done article…I did not see the average “returns” of the APM or the Family Offices mentioned. Only that the APM “underperformed” by 3.15%.

    It would be nice to see what performance figures we are comparing.


    John Dade
    Sr. Managed Account Specialist
    Essex Futures