Why Managed Account Providers Will Keep Eyeing RIAs

Customizing portfolios is getting easier and it’s hard to sell to the fragmented independent channel. But that won’t deter managers.

(Illustration by RIA Intel)

(Illustration by RIA Intel)

Software is making customizing portfolios easier and selling asset management strategies to the fragmented group of independent RIAs is challenging. But managed accounts — portfolios of individual securities, such as stocks or bonds, run by investment professionals — are growing in popularity at RIAs and that is expected to continue.

The share of assets in managed accounts (or separately managed accounts) contributed by the so-called wirehouses, including Bank of America’s Merrill and Morgan Stanley’s advisor network, has steadily declined over the past decade. At the end of 2008, almost 60% of the $1.3 trillion in managed account assets were with the wirehouses. At the end of 2019, managed account assets had grown to $7.4 trillion and wirehouses contributed only 45%, according to a new report by Cerulli Associates, a Boston-based financial research firm.

But the shift is not because wirehouse advisors are less interested in managed accounts. Wirehouse advisors are the most prolific users of managed accounts, allocating 18% of client assets to separate accounts, and their usage is expected to increase in the coming year, according to Cerulli. The shift is largely due to greater adoption of managed accounts, especially by bank branch-based advisors and RIAs.

At banks, where managed accounts assets have grown six-fold over the last decade, managed account platforms are “generally more profitable, typically require less operational burden for the bank, and lower the potential for conflict of interest with Regulation Best Interest (Reg BI),” the Cerulli report says.

Meanwhile, the wealth management industry’s independent RIA channel continues to grow and evolve, which will mean even more opportunities for managed account providers in the future. Assets in the RIA channel grew close to 12% annually from 2010 to 2020 making it “impossible to ignore,” according to Cerulli.

The desire for providers to grow their business and a need on the part of advisors to outsource investment management will lead to growth.

“We’ve been beating the drum that advisors need to outsource investment management,” Matt Belnap, a senior analyst at Cerulli Associates, told RIA Intel. Cerulli estimates that only 7% of advisor practices have the personnel in place to effectively build their own custom portfolios for clients.

Despite the expansion of managed accounts to new segments there is still a “significant opportunity for asset managers” because of the relatively smaller use compared to other vehicles.” All other channels invest in managed accounts at about half the rate wirehouse advisors do, according to Cerulli.

Selling managed accounts to RIAs is difficult, because of the channel’s fragmentation, and requires “substantial investment in data.” But the list of large RIAs is growing (meaning more to gain from fewer sales meetings) and smaller and newer asset managers will continue to seek to do business with RIAs too, especially the managed account providers that haven’t made it onto the menu of investments available to network of broker-dealer advisors.

Software is making it easier for advisors to customize and manage portfolios, but Belnap doesn’t see the rise in those services significantly diminishing the interest in managed accounts. Some portfolio management solutions don’t support all security types (even bonds), leaving a need for a separate system of some kind.

But even with a system in place — and assuming a client is better off owning, for example, individual bonds rather than a mutual fund — that still begs a question: does an advisor have the expertise and time to manage that themselves?

Enough RIAs are going to answer “no” that they will continue to seek out managed account solutions.

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