Firms Should Provide Advisors More Choice For Client Portfolios

In-House Model Portfolios Are The Norm, But These Benefit The Firm While Limiting Choice For Advisors. There’s A Better Way.

In our last piece, we wrote about gradual industry shifts tending to be as disruptive for advisors as when firms enact abrupt policy changes. For example, we noted that product platforms today include far fewer alternative investments than a decade ago.

To be sure, the decline in the number of available products wasn’t something that happened overnight. It was a slow burn.

Nonetheless, the industry-wide trend toward offering less product choice and flexibility has slowly affected many advisors’ ability to serve their clients – especially in recent years, as interest rates have spiked and equity and bond markets have become more volatile.

In-House Model Portfolios Are Now The Norm

Small changes are also taking place with in-house investment models across the industry. But in this case, they aren’t going away. They are getting more pervasive, with an increasing number of firms requiring their advisors to use them.

Firms will argue that this is meant to offer better support and provide more scale so advisors who have acted as portfolio managers will have infinitely more time to spend with clients and engage in business development activities.

While that argument has some merit – constructing, implementing and monitoring portfolios for hundreds of clients does take a lot of time in most instances – it masks what else is behind the move.

In-House Models Are Good For The Firm

In-house models make compliance and supervision far simpler. Advisors have fewer choices, which limits the number of performance results firms must monitor and address. Further, other tasks are easier as well, including product due diligence, advertising review, marketing and even training. All that saves time and firm resources.

The other reason firms embrace in-house models, of course, is because the economics are good: These models can be a significant revenue source, with firms often collecting a fee to manage them. What’s more, scaling with proprietary models can also build clout with custodians, asset managers and other platforms, helping to generate additional revenue shares and/or other financial support for the firm.

In a world where margins are getting slimmer each day, firms are reluctant to give up these revenue streams.

In-House Models Create Conflicts Of Interest

There are, however, inherent conflicts of interest when using in-house models, including extra revenues to the firm. Advisors should not put their clients in an investment based on how much compensation it pays them. Likewise, limiting investment options to those that earn the firm more is inconsistent with putting the client’s interest first.

Just as significant as compensation is limiting the advisor’s available investment solutions for clients. As the old saying goes, when all you have is a hammer, everything looks like a nail. The firm’s model portfolios may not always meet a client’s unique objectives.

Not everything is a nail

In-house models can be used quite effectively. However, some advisors are skilled and passionate about asset management and have built their businesses and reputations around crafting custom portfolios for their clients.

Choice Is Good

None of this is to say that in-house portfolios are fundamentally bad. They’re not.

Firms should exceed advisor expectations

But advisors should have the option to choose whether to use them. That’s the type of flexibility Strategic Blueprint offers: It empowers independent financial advisors to provide customized solutions to their clients.

Whatever the case, the gradual shift toward stripping advisors of choice is neither a good development for the industry nor the clients they serve.

Good advisors exceed the expectations of their clients, whether it’s having an extra layer of curiosity that allows them to uncover additional planning needs or doing something as simple as coordinating with tax professionals. Firms should do the same for their advisors: exceeding expectations with added choice and support.

Bryan Yvon is the Director of Business Development at SFA Partners, an Atlanta-based family of companies focused exclusively on empowering independent financial advisors.

This article is part of WSR’s Sponsor Partner Content series.

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