Unlocking Real Value Blog

Beware The Rise Of Advisor-As-PM Managed Accounts

Having recently read a number of articles about the significant growth of advisor- or rep-as-PM (portfolio manager) managed accounts, a phenomenon that has actually been taking place since the 2008 financial crisis, I’ve been wondering what’s driving this trend – and do advisors really want to go there?

One such article detailed the rollout of a new trading technology platform at Merrill Lynch included the following two points:

  • More than 3,800 Merrill reps participate in this program, managing assets of about $88 billion.
  • A new survey from the Aite Group found that 42% of respondents think that this segment will be the fastest growing for clients with between $250,000 and $10 million in assets, which is well ahead of other fee- and no-fee-based options.

These accounts give the advisor more control over managing client accounts; in particular, they offer the opportunity to raise cash quickly. This feature is especially important during volatile markets. But, frankly, I don’t buy into this theory.

Top advisors retain control of asset allocation decisions regardless of the chosen investments; this is one of their value-added functions. Such control would include the client’s overall allocation to cash. Additionally, many investment mangers have altered their cash-raising capabilities in the face of the 2008 financial meltdown, making it easier for them to react to the market.

Why this trend then? Perhaps fees are one reason. Compensation in these accounts is generally higher to the advisor, since there is no outside investment manager involved. Fees in general are being squeezed today in the face of years of mediocre market returns. Positioning oneself to get a larger portion of the fee is one way to increase revenues.

Regardless of the reason, however, I would caution advisors that have moved, or are considering moving, the majority of their business into these types of accounts. Remember why traditional fee-based accounts have grown as they have. Hiring an outside investment manager somewhat shields the advisor from poor performance, in addition to putting them on the client’s side of the table. If an advisor hires a number of managers for a client, for example, and one begins to underperform, that manager is replaced – not the advisor.

This traditional model allows the advisor to concentrate on what most advisors do best – relationship management. It’s hard to prospect, market, service and manage investments all at the same time. It’s much more effective to hire a specialist to manage each portion of a client’s portfolio. Remember the theory of gaining control of the client by giving up control of the investments.

I don’t mean to infer that all advisors that participate in these programs are making a mistake. Some advisors truly have an aptitude for managing money. Even these advisors, however, should probably only be managing a portion of each client’s assets. Top advisors should diversify their books of business, just as they diversify a client’s portfolio.

There is a place for advisor-as-PM accounts, particularly in a partnership in which one partner can concentrate on this area. However, I question whether all the growth we are seeing in this area is a positive trend, and if advisors are doing themselves or their clients any favors by jumping on the bandwagon.

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