Unlocking Real Value Blog

AK In The News: Advisors Use Preferred Lists, Don’t Admit It To Clients

I was asked to comment on a poll which asked Ignites (a Financial Times Service) readers on the impact that the Preferred Lists provided by their firms has on their investment selection process. More than half (57%) said that they regularly use them but don’t admit it to clients. 20% said that they were highly influential in their selection process.

Now, lets be honest, when you answer a poll question you have to pick the one that is closest to your thoughts. I chuckled when I heard the results because of that extra line “but don’t admit it.” I don’t think this answer is quite as scandalous as the headline might indicate. The reason is that there is often no reason to tell the clients that you do rely somewhat on the advice of your firm – as long as you do something above and beyond just taking their recommendations.

In fact, in my mind, that is what differentiates the better advisors from their peers – they take the available information and then add some layer of their own work above and beyond it. To quote from the article: “But the extent of that influence varies by channel and advisor type.

Advisors with investment expertise — as opposed to financial planning and client service specialists — are more likely to forgo consulting recommended lists and instead pick funds based on past experiences with certain products and managers, consultants say.

Even so, such advisors remain likely to at least evaluate these firm-approved products as a starting point for their own analyses. Whether advisors look beyond the preferred list likely hinges on their comfort level with technical investment concepts, says Andy Klausner, partner at AK Advisory Partners.

“It depends on the advisor’s sophistication, their experience and the size [of their book]. It’s the newer, younger, less experienced advisors that rely more on recommended lists and model portfolios,” Klausner says. “The more experienced people want to say, ‘I pick my own manager and do my own research.’

“It’s always a good selling point to address what you do above and beyond what the firm does.”

Certain segments of the industry are also more likely than others to balk at buying products prescribed by a central research unit. Both Klausner and Fronczke say that reliance on recommended fund lists appears highest in the wirehouse and regional broker-dealer channels and least prevalent in the independent RIA space.”

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