Managed Account Sponsors Shifting Advisers off Portfolio Management, According to Cerulli

Managed accounts are poised to continue growing, but advisers may not be as hands-on in terms of managing the investments within, according to research released Thursday by Cerulli Associates.

Managed accounts, a popular tool in retirement plans to offer participants personalized advice and investing, may see more management from a sponsor’s home office than from advisers on the ground, according to the research consultancy.

The percent of sponsor firms with a “formal process” for removing adviser discretion of accounts is 52%, with an additional 16% of firms considering implementation. Meanwhile, 27% of managed account sponsors are making modifications to their rep-as-portfolio manager, or RPM, programs to align more with other business objectives, and 15% are actively encouraging advisers to give up portfolio discretion.

The shift reflects a push for advisers to spend less time on portfolio construction and more on client development, increasing assets under management and growing overall productivity, according to Cerulli.

“Outsourcing to a home office or third-party solution can be beneficial to an advisor,” Michael Manning, a Cerulli wealth management analyst, said in a statement.

Advisers, he notes, are moving toward “holistic financial planning” and being a “lifetime financial coach,” which means shifting further away from investment selection.

“As more advisers embrace this philosophy, the need to act as a portfolio manager will become less important,” Manning said. 

The shift in strategy does not appear to mean a shift away from managed accounts or continued development. Cerulli estimates that managed accounts will grow to $15.6 trillion by 2026, meaning 13% annual growth over the next four years.

In its second quarter earnings report released Wednesday, financial services firm and managed account provider Morningstar Inc. reported a jump in workplace solutions managed accounts of 3.8%. The jump comes after a few down quarters for the workplace solutions managed account offerings, which include both managed accounts within retirement plans and adviser-managed account offerings.

“We have had success in gathering assets both from our traditional managed accounts through our recordkeeper partners as well as in our Advisor Managed Account program,” James Smith, global head of workplace business strategy at Morningstar, said via email. “Advisor Managed Accounts is growing at a much faster rate, but since it is starting from a lower asset level (given it just launched a few years ago), the total asset growth amount is lower than traditional managed account asset growth amounts.”

The movement away from having an RPM program for managed accounts is also being driven by compliance concerns, according to Cerulli. A whopping 82% of sponsors are worried about consistent underperformance of managed accounts, and Cerulli noted that adviser performance varied more widely than did home office management.

“Over three-, five-, and 10-year periods, advisory programs have the highest dispersion (average difference between best- and worst-performing programs each quarter),” Cerulli wrote. “Straying from investment policy statements (76%) and lack of investment review (70%) are additional sponsor compliance concerns, according to the consultancy.”

Despite the desires of sponsors, about 60% of advisers say portfolio construction and security selection are a core tenet of their practices. So while Cerulli wrote that it sees “the logic behind home-office outsourcing,” the firm suspects many sponsors will continue to support RPM programs.