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The Top 100 Wirehouse Advisors in America 2011

If you're among the biggest and best advisors on Wall Street, the guys who rank high on our Top 100 lists every year, you are likely gunning for more control over the individual securities in your clients' portfolios than ever before. Granted, the typical corner-office advisor has always taken a more direct role in designing portfolios than the rest of his colleagues. Rather than farm out asset allocation and investment selection to third-party managers and TAMPs, he might build his own models and even select individual stocks — or at least have someone on the team, a research analyst, who picks the individual securities for him. He might also take discretion over client assets so he can make investment decisions without getting client approval for every individual buy and sell trade.

But it has typically been a small percentage of the most experienced advisors who would go this route. The vast majority of advisors have tended to outsource portfolio construction and decision-making so that they could focus on planning — estate planning, retirement planning — as well as winning new clients and managing client relationships.

Then the market and the economy fell off a cliff in 2008.

Since then, so-called rep-driven investing programs — the kind where advisors have primary decision-making authority over individual securities — have been the fastest growers in the Wall Street wirehouse world, climbing from a 30 percent market share of the $2.3 trillion parked in retail managed accounts in the first quarter of 2008 to around 40 percent today, according to Cerulli Associates data. Cerulli calls these programs “rep as portfolio manager,” where the advisor has discretion, and “rep as advisor,” where the advisor has to get approval for every trade from clients, but is registered with both the SEC and FINRA.

There are a few reasons for the growth, say executives and analysts. First, advisors have gotten more desperate to prove their value to clients after so many of those clients lost buckets of their retirement money in the downturn. Markets have also gotten more tactical post-mortgage meltdown — meaning more active management is required to keep a portfolio on track. Further, many of the rep-as-portfolio-manager programs now can accommodate ETFs and mutual funds, instead of just individual securities, which make them appealing to a much broader swath of advisors.

“The advisors value what they hear from the home office research, but they want the final stamp of authority to be theirs,” says Scott Smith, an analyst with Cerulli. “This fits in with other trends. If you pitch a UBS program to your client and then you want to leave a year later, it's going to be a lot more complicated. If you tell them, ‘We get great research, but we use our own proprietary process,’ you're likely to have a much more loyal client.”

Jim Walker, head of Morgan Stanley Smith Barney's Consulting Group, which oversees all SEC-registered advisory accounts at the firm, says discretion, in particular, becomes more important in a tactical market environment like the one we're in today. From a practice management standpoint, it's much more efficient. “You might say, I want to raise the allocation to cash. But if you have 150 clients in the same strategy, and you have to call 150 clients, it could take you a couple of weeks. Discretion allows the advisor to go ahead and do the trade for clients, so the interaction is more about how the account is doing than getting permission,” he says.

Walker says further that whereas most discretionary account programs were designed in the 1990s to support primarily stock picking, more recently they began to allow ETFs and mutual funds in the accounts. This makes it much easier for individual advisors to execute an asset allocation program on behalf of clients themselves. For example, the advisor might choose index ETFs for beta and then select specialty or alternative fund managers — or sector ETFs — for alpha. “Globally, we have over $150 billion in these programs — but only 34 percent of those assets sit in individual securities. The rest is in funds, ETFs and fixed income,” he says.

While about 2,000 MSSB advisors have clients almost exclusively in discretionary accounts, many more put some client money in separate accounts and then use discretionary programs to fill in client portfolios at the edges, says Walker (think “core and explore”). And most FAs only qualify to take discretion when they have a certain amount of experience in the business and after they have completed additional study and earned accreditation. MSSB has the greatest share of rep-as-portfolio-manager assets in the market, with 31 percent, according to Cerulli. Bank of America Merrill Lynch is second with 21 percent, followed by UBS at 11 percent.

The flow of assets into rep-driven and discretionary programs seems likely to continue, according to Cerulli. Advisors have shown the most interest in expanding their use of fee-based programs where they retained financial decision-making authority; those surveyed by Cerulli projected that these programs would account for 50 percent of their business by 2013, up from 42 percent in 2011. In contrast, advisors forecast growth of fee-based discretionary accounts with “absolute” firm or third-party control to just 13 percent in 2013, up from 11 percent today.