Are Only 7% of Financial Advisors Equipped for Portfolio Management?

A study published in October by Cerulli Associates, a Boston-based financial services research and consulting firm, found that only 7% of financial advisory practices were suited to do their own research and portfolio construction/management. Yet, according to the same study, 62% of advisors are in fact performing these functions on behalf of their clients.

Of course, there are nuances that Cerulli doesn’t fully dive into. But, we think the underlying question is relevant: Just because you can manage assets, does it mean you should?

Does the Portfolio Management Expense Math Work?

The most common reason cited by Cerulli for why financial advisors are ill-suited to perform investment management related to practice size.

In other words, your team must be large enough to support all the requisite staff that would allow for a vibrant and successful investment process. How large, you ask? Cerulli finds that firms should have at least $250 million in discretionary AUM and an average account size greater than $2 million to justify the expense.

However, Cerulli acknowledges that firms providing true customization are more likely to require north of $500 million AUM. These findings are consistent with our own anecdotal evidence, as we often encounter firms that hit resistance around the $150-250 million AUM range and must retool their investment approach in order to grow further.

Focus on Where You Add the Most Value

Much like the automobile industry over the last 30 or 40 years, the financial advice industry is retooling itself to face a future client that does not look like the ones of the past. Remember the dearly departed Oldsmobile tagline, “Not your father’s Oldsmobile?” That brand did not make it ultimately, but arguably all cars are much better built and technologically superior thanks to the outsourcing of parts and components to firms specializing in that element of the process.

This analogy applies to financial advisors. The most important and valuable use of your time is to work with your clients on developing and executing their financial plans, as well as reinforcing the behaviors necessary to ensure they stay on track. Whether or not you picked a hot mutual fund or allocated to a unique ETF will mean less going forward.

Capabilities & Expertise Matter

Cerulli’s study is alarming on the surface and invites the questions of what it really means to be a fiduciary. Are firms that provide portfolio construction services without having the appropriate resources to do so really complying with a fiduciary standard?

We don’t want to beat a dead horse on this topic and, as an outsourced asset manager to financial advisors, we’re not here to talk our book either. We just know that the top financial advisors we currently serve have a keen focus on their core strengths and capabilities, and they leverage partners where they need support.

Behavior of Top Financial Advisors

In general, the Blueprint Investment Partners client base tends to be financial advisors who are planning-focused, more tech-savvy, and very entrepreneurial. Many either started independent or broke away from big wirehouses. We have found repeatedly that this type of advisor is usually more receptive to outsourcing their asset management functions than the less planning-focused advisor, who is more accustomed to primarily selling investment performance.

So, while we found the headline of the Cerulli study to be a little jarring, the data and our experiences point to a similar conclusion: The environment for advisors to scale their businesses with the help of an outsourced asset manager has never been better. And retooling your business to serve the client of the future has never been more necessary.

Selfishly that’s good for us. Even better, it’s great news for Main Street investors.