Managed Account Services Growing More Complicated

Research from financial analytics firm Cerulli Associates finds managed account providers are fielding an increasing number of questions and information requests from clients, stemming mainly from the growing size and complexity of managed accounts as a product category.

Tom O’Shea, associate director at Cerulli, explains that managed accounts once comprised only a handful of investment types, including mutual funds, individual securities, and sub-advised accounts. Today, providers are adding exchange-traded funds (ETFs), liquid alternatives, model-driven portfolios, and other options to the mix.

Besides the proliferation of investment vehicles, the growth of rep-as-portfolio-manager (RPM) programs has added another layer of intricacy, O’Shea continues. Through RPM programs, financial advisers are re-asserting their role as the client’s adviser on asset allocation, rebalancing, and security selection, he notes. 

Cerulli suggests the rise of RPM and new managed account vehicles has placed a tremendous operational burden on managed account providers. As O’Shea explains, providers will need to update antiquated technology platforms that were built for a simpler time when the number of managed account options was far smaller, to keep up with demand.

The findings are from Cerulli’s fourth quarter 2014 issue of “The Cerulli Edge – Managed Accounts Edition,” which explores a number of questions ranging from the state of tax management in RPM programs to the biggest challenges presented by managed accounts.

The analysis finds that prior to the market downfall of 2008, financial advisers tended to delegate asset allocation, rebalancing and security selection for clients' managed accounts either to dedicated home-office teams or independent sub-advisers. As the markets declined, however, Cerulli says clients increasingly pushed their advisers to re-allocate their portfolios quickly, in some cases requesting total liquidation. Having relinquished so many aspects of portfolio construction to others, advisers found themselves incapable of nimbly responding to their clients’ demands.

Cerulli says the growth of RPM programs manifests advisers’ desire to take back control of client accounts and assure that, in the future, they can more quickly accede to client requests. But while the assertion of control may help advisers better react to future client demands, it also complicates relationships established prior to 2008, when advisers, providers, portfolio managers, and sub-advisers settled on a clear division of responsibilities in portfolio construction. And, as Cerulli notes in its report, RPM programs can seriously challenge the efficiency and scalability of an adviser's business model.

In an effort to protect market influence, portfolio managers and managed account providers are pioneering ways of helping advisers minimize the tax consequences of transitioning accounts from one sub-adviser to another, Cerulli says. Despite these advances, advisers need additional training on using all the techniques of tax-savvy investing throughout the entire calendar year.

Cerulli warns the rise of RPM and new managed account vehicles has placed a tremendous operational burden on existing technology platforms in the industry. However, developing revised platforms can be so expensive and time-consuming that only the largest firms, with the most extensive information technology resources, appear to be able to manage the project in-house. Most other firms will have to outsource their efforts to platform vendors that specialize in the intricacies of the managed account business, Cerulli finds.

Information about how to purchase this and other Cerulli reports is available here.