Is Proprietary Asset Management Making a Comeback?

Wealth managers may be breathing new life into proprietary investment management.

Over the past decade, firms offering clients their own investment products  increasingly lost ground to those recommending an "open architecture" array of investment options from outside managers.

But Optima Group, the Fairfield, Conn.-based research and consulting firm says it’s noticing “a resurgence of interest in proprietary management by wealth managers.”

Open architecture surged in popularity, says Ken Hoffman, Optima’s managing director and president, because it “allowed brokerages to clearly distinguish themselves from wirehouses and other brokerages whose objectivity of advice may be compromised by the sale of proprietary product.”

Paradoxically, open architecture may have been the victim of its own success.

“As the popularity of the RIA model has grown and as brokerages themselves have embraced open architecture,” Hoffman continues, “it has become increasingly difficult for wealth managers to differentiate themselves on this basis.”

As a result, Hoffman says, “we expect a higher percentage of newly minted RIAs to manage money in-house and more existing industry leaders to selectively reintroduce proprietary management as an option.”

For example, Mirador Capital Partners, a newly-minted RIA launched this month by a breakaway team of five former Morgan Stanley advisors, led by founder Don Garman, is in fact a proud proprietary manager. The Pleasanton, Ca.-based firm’s flagship fund is the Garman Global Growth & Income portfolio, which Garman describes as a “go anywhere, do anything” fund investing in equities, fixed income or cash around the world.

Garman prefers to call his actively-managed approach one of using “proprietary strategies” to meet clients’ goals. Mirador’s “risk based investing style,” he says, “is more nimble and flexible than what a third party manager system can produce.”

The problem with open architecture, Garman argues, is that an advisor “can’t switch managers fast enough” when market conditions change quickly. “Open architecture is a can’t-pivot approach,” he says.

Nevertheless, about 60% to 70% of RIAs now use open architecture as part of their value proposition, according to Optima Group’s research director Dennis Dolego.

“When I apply the filter of fiduciary responsibility, I can’t come to the conclusion that proprietary is the right thing to do,” says Jeffrey Buckner, founder and chairman of St. Louis-based RIA Plancorp. “As fiduciaries our role in life is to provide the best investment solutions to our clients that include risk control, diversification, and exposure to a broad range of asset classes. I haven’t seen any [proprietary products] that offers the degree of diversification that public products can offer.”

Garman says that “nothing prevents me from using Sanctuary [the firm’s platform provider] to offer investment themes that we don’t specialize in.”

The open vs. proprietary debate also extends to branding, according to Optima.

“Open architecture used to be a very clear point of differentiation,” Dolego says. “But now it’s very difficult to differentiate the manager search and selection process that advisors use. It’s more generic now, and they’re all going to the same managers.”

The market crash and fallout from the financial crisis of 2008 also hurt open architecture, Dolego says.

“Outside managers suffered just as much as proprietary managers,” he says. “Many outside managers looked like quasi-indexers and that is not a strong rationale for open architecture.”

Then there’s the matter of fees.

“The key question is whether fees are fully disclosed,” says John LaPann, chairman of Boston-based Federal Street Advisors, a fee-only wealth manager that does not offer proprietary products and only uses outside managers. Federal Street charges – and tells – clients that their “all-in” fee includes a payment to the firm and a fee that is paid to the underlying fund manager.

The problem, say critics, is when firms are compensated by asset managers or mutual funds for steering clients to their fund and that payment, or “selling agreement,” is not disclosed and “passed through” to the firm, as opposed to being “passed along” to the client  in the form of a discounted fee.

“Most institutions don’t disclose everything they do in plain English, and the public is totally confused,” says industry consultant Jamie McLaughlin.  “The irony is that proprietary products, whatever you may think of them, are shamelessly transparent. It’s very clear that all the clients’ money goes to the firm that manufactures them.”

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