Flexibility. Tactical allocation. Macroeconomic analysis.

This is not just the new name of the game for the mutual fund industry, but for the managed account business at brokerage firms, as well.

For the $2.4 trillion managed account industry, "registered representatives acting as portfolio managers," or RPM, at such brokers is the fastest-growing area of the industry, according to speakers at Money Management Institute's Fall Solutions 2011 conference in New York last month.

In the past three years, RPM has grown more than 40% each year to account for 38%, or $912 billion, of managed account assets.

And this rapid growth is making it easier for investment managers to approach such reps with model portfolios-since these models save the reps time in the investment decision and portfolio construction process.

"Brokerage firms without a rep as portfolio manager strategy are missing the boat," said Mark Zeitoun, managing director and head of distribution at Rydex/SGI.

Some brokerages are even going one step beyond "rep as PM" to "rep as adviser," whereby they offer complete financial planning.

"I think rep as adviser makes a little bit more sense," said Jay Link, managing director of the managed solutions group at Merill Lynch. "These reps as advisers are doing more than just portfolio management. They are true wealth consultants. This is an entrepreneurial community, for sure. Many are style specific. Others approach this as a level of professional service to provide a better level of experience for ultra-high-net-worth investors."

Peter Malafronte, executive director of managed accounts at UBS, agreed with Link that he believes most reps are providing holistic services for clients, inclusive of trusts and estates. "I don't think RPM adequately captures what most reps are doing for the clients," Malafronte said. "Rep as adviser is a clearer description."

Whether the nomenclature is RPM or rep as adviser, speakers said, two things are certain:

* First, the advisory business is poised to continue to grow in the face of continued market uncertainty.

* Second, as the advisory business continues to grow, reps and their brokerage home offices will become more receptive to models and other types of "guardrails" from asset managers.

"The catalyst for the ascent of the RPM business was the market downturn of 2008, when financial advisers increasingly began to recognize the need to manage client accounts more nimbly," according to a FUSE Research report that MMI released at the meeting, titled "Trends in the Rep as Portfolio Manager Business-and Opportunities and Challenges for Investment Managers."

"It became clear that discretionary relationships that also provided practice scalabilities, greater efficiencies and control, and tactical flexibility could offer a solution," the report said.

The next step will be "enhanced platform capabilities" that will permit "the home office [to] include external models from outside investment managers on their trading systems so that the financial adviser can easily implement these strategies," the FUSE report continues.

Models could also help diffuse skeptics' argument that advisers are not truly capable of managing money, said George Raffa, senior vice president and national sales manager in the asset management division at Raymond James.

"It is our job to provide tools to financial advisers to do their jobs," Raffa said. "Assets in separately managed accounts are hard to move. You increasingly hear this word 'transparency.' It is our job to be transparent with models and the search and selection process. I think advisers can get the job done with the support of the home office."

Which can be greatly supported by models.

Brokerage reps are also keenly interested in products that include hedging, shorting, options and margin strategies, Link said. "These types of products, including inverse ETFs, are not commonly available, so I would say they are interested in product innovation. We have also seen a proliferation of non-correlated investments."

So, as the complexities rise, Link continued, "a good part of the way for an asset manager to penetrate this world is an education process. You can educate analysts on brokerage teams about different types of alternative investment mutual funds, and which asset classes they should take money from to put into these alternatives."

The key to speaking with these analysts, Link advised, is to "reach them proactively-with conviction."

Fixed income is also seen as a great solution right now, Raffa added. "It's a leading-edge discussion. The market share is not very high-but it gets you an appointment and into the discussion."

Advisers have also been showing increasing interest in tactical asset allocation, Malafronte noted.

But like the obstacles to obtaining shelf space for individual mutual funds at a brokerage or fund supermarket, figuring out who decides which model to choose is tricky, Raffa said.

"You've got to fight for that shelf space," Raffa said. "Who controls the shelf space? Is it done locally by the adviser? Is it based on research at the home office?"

It gets a little bit more complicated in that many brokerages allow the home and the satellite offices to share responsibility for selection of the models, he said.

UBS, for instance, makes models optional for its financial advisers. "Some FAs use those models lock, stock and barrel," Malafronte said. "Others use them merely for educational guidance."

While rep as portfolio manager and rep as adviser is more involved and time-consuming than non-discretionary business, the biggest upside is "sticky assets," speakers said.

"The assets are stickiest because the reps offering RPM and advisory services are our top asset gatherers. The discretion is a by-product of the fact that they are our top advisers," Raffa said.

As a result of this strong partnership between Raymond James' most successful reps and most desirable clients, the cancellation rate on the reps' investment decisions by clients is only 11%.

"In 2008, our cancellation rate went through the roof. It was somewhat of a religious experience," Raffa said.

Another positive byproduct of discretionary accounts is that "clients are willing to pay fees that average 15% higher than nondiscretionary accounts because of the perception of the added value," Raffa said.

At Merrill Lynch, "Some of the top-performing teams are restructuring around rep as portfolio manager as their central service model," Link said. "Many advisers appreciate and like to leverage the resources of a large organization like ours to bring to bear on a relationship."

-- This article first appeared on Money Management Executive.



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