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Cetera Arms Advisors Against Volatility with Products, Resources

SuperUser Account posted on July 24, 2012

By Mark Gerlach July 24, 2012 
Cetera Financial has added products that aim to help advisors navigate rocky markets and launched educational efforts, including a series of whitepapers, geared toward helping advisors understand how to use them to insulate their clients’ portfolios. 

The firm continues to look for funds with more flexible mandates that can help mitigate volatility, according to VP of research at Cetera, Gene Goldman.
“We have added mutual funds that are more unconstrained, allowing managers to take advantage of volatility instead of being locked into one style box,” says Goldman in an e-mail response to questions. The home office has also recommended greater use of alternative strategies to the firm’s network of 6,500 advisors.

The research team recommends that its advisors increase their exposure to income-producing strategies, corporate bonds and dividend-paying equities and has added mutual funds that focus on these types of investments, according to Goldman. Compliance restraints prohibit Cetera from specifically naming the strategies that have recently been added to its platform, according to a company spokesperson. 

“Corporate bonds offer an attractive yield advantage over treasuries because many investors remain concerned that consequences of the Great Recession may continue to be a problem for issuers of corporate debt and therefore demand higher yield as compensation for this perceived risk,” the whitepaper says. 

“Adding these yield-generating investments to a portfolio provides investors with a more consistent income component that is independent of underlying price movements,” says the whitepaper series’ first installment, “Income Strategies to Mitigate Market Volatility.” Cetera’s research group expects below-average market returns and increased volatility for the remainder of 2012, according to the whitepaper. 

The recent report is the result of research that the company conducted last fall. The whitepaper includes various charts, depicting information such as the number of days per calendar quarter that the S&P 500 swung up or down by 1% between 2003 and the first three months of 2012. Other data points include credit ratios of the S&P 500 dating back to 2006. 

Escalating violence in the Middle East, upcoming U.S. elections in November, a growing domestic budget deficit, and spiking commodity prices—particularly oil and gas—are among the major factors influencing volatility, according to the whitepaper. Also kepping markets jittery is a cutback in stimulus spending my Chinese policy-makers. “This will likely create a pull-and-push effect in the financial markets, leading to elevated volatility levels,” says Goldman. 

The whitepaper series is also a tool to guide advisors who might not use these models to construct portfolios in a way that is consistent with the themes coming out of the home office. 

Growth of rep-as-portfolio manager (PM), in particular, is a “real concern” to broker-dealers, says Scott Smith, associate director at Cerulli Associates. That concern may be one of the driving factors behind Cetera’s new research. In Rep-as-PM programs, individual advisors pick the mix of investments in client portfolios rather than that of the home office research team, says Smith. Such programs grew 11% industry-wide during the first quarter of 2011 to $447.5 billion, according to data from the Money Management Institute (MMI).

“In the [independent broker-dealer] space you cannot forcibly encourage [advisors] not to use rep-as-PM,” says Smith. The research might be a tool used by the home office to point advisors “in the right direction,” says Smith. 

The whitepapers will “get advisors to either directly rely on the tips that they’re getting and implement them in rep-as-PM programs” or encourage advisors to consider using some of Cetera’s models and discretionary programs, Smith says. 

“Advisors are interested in building ‘better portfolios’ but they’re not quite sure how to do it yet,” says Smith. 

By providing guidance, Cetera can help free-up the time an advisor may spend trying to understand the rapidly changing market to allow more time for advisors to work directly with clients and grow their business, says Smith. Advisors can get information from sources like Morningstar and outside consultants. However, Cetera’s home office wants to “make sure that their advisors are getting influence that the home office agrees with,” he says. 

A strong home office message can be alluring to advisors, says Rick Rummage, founder and CEO of recruiting company The Rummage Group

“Advisors are always looking for good ideas of what to talk to their clients about,” he says. While the number of advisors for whom providing resources like whitepaper series influences their decision to join a broker-dealer may not be “earth shattering,” showing that advisors can look to the home office for support can make a difference. “It’s sales at the end of the day,” Rummage says. 

Since opening its doors in February 2010, Cetera has been working to build its brand and advisor population. The firm recently added a fourth broker-dealer to its network when it acquired Genworth Financial Investment Services

“My impression is that Cetera is slowly trying to promote that brand more than the individual brands of the companies that they own,” he says. “Why not get all of the advisors out there to think of Cetera, when you have 6,000 [advisors] strong, rather than this group of names.” 

The other affiliated broker-dealers that Cetera owns include: Financial Network Investment Corporation, Multi-Financial Securities Corporation and PrimeVest Financial Securities

“The goal is to keep what they have and bring in new advisors,” Rummage says. “They don’t want to make too many grand announcements that, ‘Hey we’re going to start changing everything to Cetera,’ but that’s in essence what they’re going to do most likely.”