Part 1 of 3 in a series based on our research paper on discretionary portfolio management, “Control vs. Customization in Wealth Management: Advisor Discretion Doesn’t Have to be a Zero-Sum Game.”
The ability to customize has been a game-changer for many industries. For advisors, having the flexibility to create client-customized portfolios not only drives growth, but can help set your clients up for long-term success. This level of customization and control is available to advisors through what we’ve coined “Discretionary Portfolio Management (DPM)”.
Broadly defined, these are the fee-based discretionary advisory programs where financial advisors and their associated team act as money managers for their clients. In the standard Rep-as-Portfolio-Manager program, the advisor takes full responsibility for selecting and implementing a client’s investment portfolio, but there are variations depending on where the programs are hosted.
Advisors want discretion, customization
Higher levels of discretion and customization are often credited with helping advisors grow their business by winning larger and more complex wealth management clients traditionally serviced by family offices or boutique RIAs. In many of these complex wealth management clients, the normal guardrails set up by the home office can have a negative effect on the client’s overall portfolio.
Without the flexibility they need, advisors may see themselves as less-competitive and, subsequently, growth-constrained. In other cases, we have advisors frustrated when their firm’s rules force them to do the wrong thing for clients, such as forcing inappropriate allocations or trades.
DPM is a recruiting and retention tool for firms
Because of this, the DPM offering has become a top selling point for attracting advisors onto sponsor platforms as well as a bulwark against advisor attrition. In nearly all of our conversations we had while writing the report, executives were allocating resources and attention to expanding these DPM programs.
Growth comes at a cost
However, increased advisor discretion may come at a cost for firms.
Where model-based portfolios are centrally-managed and carefully tended to, DPM portfolios are generally left to the whims and management process of their advisor. This can mean serious risks like company concentrations, portfolio drift, performance inconsistencies, and compliance issues can get out of control without anyone knowing about it until it’s too late. Without the right tools to ensure a proper mix of customization and control/oversight, these risks have led to the clamping down of advisor control and flexibility in some firms.
Balancing the needs of the home office and advisors
At the end of the day, DPM programs are primed to become the future of wealth management. We encourage you to download the full report where we take a deep dive into this trend, define and sift through the nuances, drivers, frustrations, and identify best practices around implementing DPM programs.
Stay tuned for our next entry in this series, where we’ll explore the spectrum of discretion for balancing the demand for customization with the need for control. You can also download the full report here.