Talking Digital Advice Trends With Morningstar and DFA

Asked for a basic summary of his firm’s expanding collaboration with Dimensional Fund Advisors (DFA), Dan Bruns, head of digital advice at Morningstar Investment Management, had a ready response.

“The vision is to pave the way for registered investment advisers [RIAs] to significantly advance the retirement industry by democratizing high quality, personalized advice at scale,” Bruns tells PLANADVISER. “You can envision this as our effort to bring more of the capabilities of the high-net-worth wealth manager to the mass market of retirement plan participants.”

In practical terms, adds Ashish Shrestha, head of adviser defined contribution (DC) at DFA, the firm is set to become the first asset manager to directly team up with Morningstar Investment Management to bring a customizable, adviser-driven managed account service to market. With the move, Morningstar has expanded on its standing managed accounts service, the Morningstar Retirement Manager, by “creating space” for RIA firms—and now, the first fund manager—to apply their own philosophies to the investment models and fund decisions underlying the managed account.

Building a Better Managed Account Ecosystem

With DFA’s data and methodologies now being plugged into Morningstar’s system, the managed account platform acts as a true hub, Bruns says, connecting plan sponsors, 14 RIAs, 10 recordkeepers and one asset manager. Bruns says the firm will continue to seek out and integrate additional RIAs, recordkeepers and asset manager partners.

Morningstar says its goal is to position itself as the technology backbone underpinning a holistic investment ecosystem that independent advisers can use to elevate and expand their provision of customized, responsive investment advice.

“When I think about the advisers we work with, there is such a strong desire for this type of solution,” Shrestha says. “Many of the advisers we are working with may not have the same scale as the big national RIA aggregators do, but they do have a very strong financial planning background and an unmatched commitment to client service. They need a technology solution like this to be able to efficiently organize and deliver their advisory skills at scale.”

Bruns says the collaboration with DFA underscores his firm’s commitment to working in partnership with the asset management and RIA community.

“I think we are seeing that more and more advisers are coming to understand this vision, especially as they see us integrating the top recordkeepers and now a top asset manager into our solution,” Bruns says. “What we ultimately hope to do is to bring the best of each firm to market.”

Bruns and Shrestha say the role of customized managed accounts is likely to expand in the future, but they will not necessarily be the right fit for every plan sponsor client or participant group.

“As with existing managed account solutions, this won’t be as relevant for every type of plan demographic out there,” Bruns explains. “Younger and more homogeneous populations, for example, may still be better served by more basic target-date funds [TDFs]. On the other hand, there will be a significant segment of a given RIA’s client base where this approach can be very valuable, we believe. For example, if an employer has an older and more established workforce with higher balances and different expectations for retirement, this group will very likely benefit from added customization, especially when the customization is delivered efficiently by relying on our technology.”

Both Shrestha and Bruns spoke in favor of the wider market developments in the area of “dynamic” or “hybrid” qualified default investment alternatives (QDIAs). These solutions, generally speaking, start by placing an investor in a low-cost managed account before eventually moving him into a personalized managed account solution once he has generated substantial assets or demonstrated strong engagement with his retirement plan.  

Other Players in the Game

While Morningstar and DFA say their approach will deliver enhanced customization and responsiveness to RIAs seeking to implement managed accounts for their plan sponsor clients, other firms are positioning themselves to do the same. For example, back in February, Prudential Retirement unveiled the Advice and Income Engines at Prudential solution, which it bills as “a next-generation digital managed advice platform powered by NextCapital.”

According to the firms, the solution provides DC plan participants with access to retirement planning and personalized portfolio management, designed to help them generate a source of income for retirement. The service launched in the first quarter, with several key features and new integrations anticipated to follow its launch.

“More than 100 million Americans rely on a defined contribution plan as the foundation for a secure retirement,” says Harry Dalessio, head of institutional retirement plan services at Prudential Retirement. “Incorporating a managed advice solution that supports understanding of income needs in retirement is especially critical during times of market volatility. Additionally, many Americans are unsure about investing and retirement decisions and prefer the convenience of getting professional financial advice through their trusted employer-sponsored defined contribution plan.”

Further back, in March 2019, Empower Retirement announced its new adviser managed account service, with several large advisory firms as early adopters, including SageView.

“Adviser managed accounts offer retirement investors the best of both worlds—the strengths of SageView’s advisers and dedicated investment team combined with all the services and technology of Empower,” says Randy Long, founder and managing principal of SageView. “It allows us to focus on designing a prudent retirement strategy for employees while having Empower there to deliver an optimal participant experience. We fully expect this revolutionary new managed account model to drive better outcomes for employees.”