JULY 15, 2017  |  ARTICLE  |  BY KELLY LYNCH |

For many advisory firms, offering managed accounts as a growth strategy requires embracing  evolving technology. Managed accounts aren’t new, but they’ve taken on greater significance in today’s complex environment where firms have heightened sensitivity to regulations and customers seek transparency and low costs. These needs put greater emphasis on technology platform factors as advisory firms seek to launch or overhaul managed account offerings.

Roughly three-quarters of RIAs are already using managed accounts,1 which allow for efficient allocations to several investment options at one or several providers. These accounts give advisors the ability to offer a range of institutional-caliber investment products, automatic rebalancing, flexible fee structures, and individualized performance reporting. With managed accounts, advisors can use models to deliver proprietary and/or third party products to their clients. The advisor allocates client assets based on a model selected according to a client’s risk tolerance and objectives.

According to the Money Management Institute, so called investment advisory solutions such as managed accounts are projected to grow 11% annually over the next five years.2

We believe interest by advisors in managed accounts is likely to accelerate for three reasons:

  1. Fiduciary Rule. While implementation of the Department of Labor’s Fiduciary Rule regulating the way advisors serve IRA and retirement investors has been delayed, the trend at many firms to transition to a fee-based advisory model has continued to accelerate. Offering managed accounts is consistent with some of the Fiduciary Rule’s requirements. Because most managed accounts are fee vs. commission-based—and because they offer firms the ability to “lock down” a lineup of models—we think managed accounts will continue to play a larger role. The good news is that managed accounts still offer some flexibility to the rep to offer an expanded range of investment options without the firm losing fund lineup control.
  2. Growth of robo-advisors and hybrid robo-advisors. As advisors respond to the growth of robo-advisors and consider models that have elements of both traditional and robo advice, many recognize increasing client interest in better technology, transparency and lower cost products. Managed accounts give advisors the ability to offer a hybrid approach where the advisor can focus more on client planning while leveraging technology to streamline asset allocation and investment selection. Studies suggest hybrid approaches are likely to grow.3
  3. Technology can drive new product possibilities and may reduce cost. New platforms, such as Envision’s FundKeeper, use technology to provide both the managed account components (models, rebalancing, fees and performance) and custody for mutual funds on one system, without a traditional brokerage platform, which can offer significant advantages over the traditional managed account approach. In the past, offering managed accounts typically added operational complexity and expense, presenting challenges to many firms. But now, it’s possible to marry the front-end account opening process with the managed account processes and custody functionality, delivering better economics to the intermediary, enabling managed accounts to be offered to a broader set of investors. Also with the FundKeeper custody approach, high transaction volumes triggered by rebalancing result in a single or few trades to each fund, rather than thousands of trades, further reducing costs and allowing firms to consider new rebalancing parameters.

Operating outside a conventional brokerage environment can also make products more widely attractive by minimizing investor costs. Traditional brokerage platforms and the associated fees can make it costly to achieve a managed account solution. The single platform approach eliminates transaction fees, small account fees and other ‘nuisance’ fees, which is an important benefit to advisors serving clients with smaller account balances. Managed accounts allow advisors to more easily serve smaller clients with products that, in the past, were only available to high net worth clients.

In the end, advisors seek to efficiently deliver the best value to their clients in a compliant way. Managed accounts and new technology that consolidates accounts on one platform are helping them do just that.

1 “Cogent ReportsTM: Managed Account Use Expected to Grow Three Times Faster for ETFs than Mutual Funds”, www.marketstrategies.com, November 14, 2013.

2 Money Management Institute, “Investment advisory assets expected reach 67 trillion 2020 according money management”, www.mminst.org, December 16, 2016.

3 Barbara A. Friedberg, “Growth of Hybrid Robo-Advisors to Outpace Pure Robos”, www.investopedia.com, Updated February 23, 2017.