Risks and Rewards of Managed Accounts

As many areas of the wealth management industry continue to evolve, it has become increasingly more difficult for businesses to decide how to invest limited resources to achieve the greatest returns, according to a study by Deloitte. In such an environment, managed account solutions may present opportunities for wealth management firms to grow assets and revenues, but they also carry risks that should be effectively managed.

According to Deloitte’s new report, “The Rewards and Risks of Managed Account Programs in the Wealth Management Industry,” assets in managed account programs have grown by 117% since 2012, and they now make up a substantial portion of assets under management and a majority of new asset flows for the wealth management industry.

Deloitte says this growth reflects a long-term industry trend away from commission-based brokerage offerings towards fee-based advisory offerings. Managed account programs are poised for continued growth, the report concludes, especially as more firms have announced plans to make them a strategic priority.

Robo-Advisers and Managed Accounts

In terms of how individualized advice is being delivered at scale, Deloitte says, robo-advisers have the potential to disrupt traditional wealth managers’ approach. Given their perceived potential to disrupt “business as usual,” robo-advisers have caused a broad acceleration in investment in digital advice offerings across the industry.

While one approach has been for wealth managers to offer their own version of robo-advice, targeted at clients with less investable assets and at a lower cost than traditional advised programs, Deloitte says this approach may not ultimately be the best response. This “split approach,” as the report calls it, may instead cause conflicts when one service is less expensive than another but could still potentially serve the same needs of the client. As the report points out, many robo-advisers in fact function as simplified managed account programs that happen to be offered digitally.

“We believe that the real opportunity for wealth managers is building an integrated advisory offering where clients can seamlessly interact with their wealth managers over a variety of channels, including digital, phone or face-to-face. This can be presented with a level advisory fee and a separate service fee that is adjusted based on the level and manner of interaction the client desires,” Deloitte suggests.

In this way, rather than offering a distinct robo-service and a separate “traditional” managed account service, the real growth opportunity may be based in an advisory service that lets the client be the driver of their own experience, the report suggests.

Revenue and Strategy Considerations

As financial advisers look to grow assets and revenues at the same time, they will need to find a way to serve more clients and more assets per adviser, Deloitte says. One way this can be accomplished is through managed account programs coupled with a technology platform that can integrate and streamline client onboarding, client reporting and other administrative tasks across back-office accounting and custody functions.

Relieved of the day-to-day management of the portfolio, advisers can have more time to spend on client relationships and business development, the report says. Managed account programs could thus enhance productivity and enable advisers to focus on delivering core services to investors.

The report warns that, despite the many attributes that make managed accounts attractive to clients, there are some potential operational and regulatory risks inherent to offering these programs.

For example, during 2016 and 2017, the Securities and Exchange Commission imposed over $400 million in penalties, partially attributable to managed account programs, the report says. In addition to fines and penalties, at least one enforcement action resulted in simultaneous action from the Commodity Futures Trading Commission and an additional $40 million in settlements.

Regulatory Matters and Marketing Reviews

To avoid both regulatory and operational issues, firms should review marketing materials, disclosure forms and client contracts in order to ensure managed account program details are accurately reflected in their policies and procedures, the report says. There should be system reviews to ensure policies, procedures and source materials are accurately reflected, in addition to a periodic review process to make sure everything stays aligned.

The report found that several SEC actions were related to fee billing where technology failures were to blame—demonstrating the need for regular and rigorous testing of all systems to ensure they are functioning properly. This is particularly relevant for managed account programs, which often rely heavily on interconnected technology platforms for end-to-end operations, the report adds.

The report also notes that firms should provide complete and accurate disclosures to clients, as the largest settlement, of $267 million in 2016, was due in part to the firm’s failure to make proper disclosures.

“Wealth management firms will only be able to fully realize the managed account opportunity if they rigorously manage the many risks that managed account programs present,” Deloitte says. “By doing so, wealth managers can harness an engine that can meet the needs of their clients, advisers and shareholders, allowing them to take the lead in the wealth management industry.”