Brokers as Portfolio Managers: What Investors Should Know

An Oct. 14 article by Investment News highlights a growing trend in the investment world: Brokers who do double duty as portfolio managers. Following the market’s downturn in 2008, the broker-as-portfolio-manager model has been steadily on the rise, said Patrick Newcomb, a senior analyst at Cerulli Associates, in the Investment News story. For investors, that trend means their reps may be charged with a whole new level of flexibility, one in which they are given complete discretion to invest a client’s portfolio assets in everything from stocks and bonds to exchange-traded funds (ETFs).

According to data from the Money Management Institute, reps were managing portfolio assets of $456 billion in more than 1.2 million individual accounts as of the end of June 2012 – up from $403 billion and 1 million accounts at the start of this year. At the end of 2008, there was $181 billion in 660,000 accounts.

Some market watchers see the broker-as-portfolio manager trend as a positive one for the industry because it is helps advisers move to a fee-based model from that of commissions on sales. However, there is a key question that investors who are considering using a broker as their portfolio manager may want to ask themselves:

Is their adviser truly qualified, trained and experienced enough to be making stock-picking and asset management decisions?

Many firms are already stepping up to the plate to ensure their financial advisers are in fact up to the task by introducing coursework and training, as well as setting minimum requirements related to the advisor’s experience with the firm. However, investors, too, can take certain proactive measures to protect themselves.

For example, one way to assess a broker’s proficiency as a portfolio manager is to look for the Chartered Financial Analyst Charterholder designation. The credential is widely regarded in the global financial industry and denotes a rigorous focus on current investment knowledge, analytical skill, and ethical standards. As of March 2012, the CFA Institute has about 107,000 members in 138 countries around the world, including about 98,000 CFA charterholders.

“The biggest challenge the industry faces today is asset allocation; advisers need to be qualified to do this,” said Morgan Stanley Wealth Management Vice Chairman Paul Hatch in the Investment News story. “There might be only 10% of advisers that are qualified to do [stock selection] today, and that’s not where it needs to be.”