DOL Rule Could Push Independent Advisors to Outsource Further

The Department of Labor’s fiduciary rule could push independent broker/dealer (IBD) advisors to rely more on outsourced IBD home-office portfolios, a new report has found.

Many IBD-affiliated advisors already outsource their portfolio models to an IBD home office or a third-party service.

But concern surrounding advisors' liability in the face of heightened diligence has broker/dealer firms seeking to refocus advisors on “home-office discretionary programs,” said Kenton Shirk, director of the U.S. intermediary practice at Cerulli Associates.

The research appears in the fourth quarter 2017 issue of "The Cerulli Edge – U.S. Advisor Edition."

The use of outsourced model portfolios is prevalent across the wirehouse, IBD and registered investment advisor (RIA) channels.

But portfolio model outsourcing is most common among IBD-affiliated advisors due to the advisor’s role as a financial advisor and business owner, and because IBD advisors tend to orient themselves in the direction of financial planning, Cerulli said.

Among IBD advisors, 43 percent are most likely to use outsourced portfolio models, 38 percent are most likely to use models developed within their practice, and 20 percent are most likely to use custom portfolio models.

For IBD Advisors, a Tool to Scale Up the Business

Under the fiduciary rule, which is designed to put the interests of investors before those of advisors, broker/dealers bear the liability for an advisor deemed to have dispensed advice that is not in the client's best interest.

Small IBDs face revenue losses in the billions of dollars under the DOL rule.

The bulk of the voluminous fiduciary rule, which was supposed to take effect Jan. 1, 2018, has been delayed until July 1, 2019, pending further review by the Trump administration.

The unexpected hiatus might give advisors time to think more seriously about outsourcing as IBD advisors decide which clients they want to keep and which ones they prefer to cast off because their account balances are too small.

IBD-affiliated advisors practicing solo or in small groups, and small RIAs with little infrastructure may want to consider outsourcing through a home-office arrangement before the full force of the fiduciary rule comes to bear.

For advisors with a higher volume of lower-balance clients - or for advisors finding it difficult to scale up and grow the business - outsourcing offers a solution, Cerulli said.

Broker/dealers struggling to keep solo or small IBD-affiliated advisories from jumping to the RIA channel would be receptive to outsourcing inquiries from advisors.

The value of home-office research, due diligence and asset allocation play in the IBD’s favor to attract small independent advisories facing the tighter strictures that come with a fiduciary world, Cerulli said.

For RIAs, an Answer to Formalizing a Relationship

Even fee-based RIAs - traditionally the least likely to outsource portfolio construction - may be more receptive to outsourcing, thanks to the growth of RIA consolidators.

RIA consolidators provide centralized investment platform and ancillary support to an independent advisory channel that is expected to grow more quickly than IBD advisors.

A home-office model provides research into alternative investments, connects RIAs with tax experts and planning professionals, supports RIAs with IT infrastructures and analytics, and even provides sources of capital when the time comes for the RIA to expand.

“This augments the argument for outsourcing for this (RIA) advisor segment,” Cerulli said.

Only 12 percent of advisors in the RIA channel rely primarily on a third party to build model portfolios, Cerulli said.

Advisors who choose to break away from their broker/dealer to an RIA may be receptive to outsourcing and the support – investment committees, a chief investment officer and the establishment of a formal investment process – such a model provides.

“For breakaways, these responsibilities were often informal in the past,” the report said. “This inflection point could be an opportunity to talk about the benefits of outsourcing.”

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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