As managed account assets reach new highs, a new report by Cerulli finds that sponsors are setting their sights on new ways to empower advisors and opportunities for advanced portfolio customization through direct indexing.
According to Cerulli’s report, U.S. Managed Accounts 2022: The Future of Personalized Portfolios, assets in managed accounts programs grew nearly 24% in 2021, reaching a high of $10.7 trillion. Sponsor firms also experienced a strong year in 2022, with all programs posting year-over-year growth in excess of 19%. As sponsors evaluate drivers for long-term growth, they are focused on improving advisor performance and cleaning up their platform architecture, the report notes.
In fact, a majority (56%) of managed account sponsors are prioritizing providing better portfolio construction resources to advisors and developing personalized investment solutions. This comes as securing consistent investment outcomes and scaling advisory practices have long been competing goals at sponsor firms, the report notes.
“Sponsor firms realize that discretion is a powerful tool for advisors. Instead of trying to take it away from underperforming advisors, they are instead giving their advisors tools to be better portfolio managers,” explains Matt Belnap, associate director at Cerulli. “This has become an important selling point for sponsors, especially as advisor mobility becomes an increasing threat.”
Direct Indexing
At the same time, nearly all managed account sponsor firms plan to increase their direct indexing and separately managed accounts (SMA) customization capabilities. According to Cerulli, direct index assets are making up an ever-greater percentage of the overall manager-traded landscape at 35% of manager-traded assets, up from 23% at the close of 2020.
What’s more, direct index separately managed accounts are a priority product for 48% of asset managers and 75% of managed account sponsors. Within the direct indexing sphere, sponsors are most interested in tax optimization (93%) and tax management (83%).
“This makes intuitive sense; tax savings are a tangible story that advisors can explain to their clients to easily highlight the benefits of the product,” observes Belnap. How direct indexing evolves beyond taxes will depend on which target market the sponsor firm intends to prioritize.
Customization and Personalization
Sponsors also realize the importance of personalization as they seek to attract the next generation of investors through environmental, social, and governance (ESG) investing. In four of five managed account program types, the share of ESG assets increased from 2021 to 2022. Cerulli sees this as an indication that advisors and clients are showing an increased interest in ESG, and that products on managed account platforms are proliferating to service this demand.
Meanwhile, unified managed accounts (UMAs) grew nearly 28% year-over-year, ranking just behind ETF advisory programs. Cerulli anticipates sponsors will continue to steadily consolidate their platforms in 2022 and beyond. The next evolution beyond account aggregation will be movement toward a unified managed household (UMH), which aggregates client relationships at the household level and creates more efficient outcomes. According to Cerulli’s data, 43% of managed account sponsors wish to further consolidate their platform into a UMH.
The firm expects managed accounts to grow to nearly $16 trillion by the end of 2025. The industry will continue to bifurcate between rep-driven and home-office-driven programs. Rep as portfolio manager (RPM) programs are expected to grow to $4.2 trillion, while UMA assets are expected to grow to $3.9 trillion.
In an increasingly crowded wealth management space, with fee awareness growing and differentiators more difficult to identify, sponsors need to offer advisors and investors flexibility and customization.
“Customization and personalization is a natural way for sponsors to add value. However, sponsors will need to weigh the benefits of traversing too far downmarket,” cautions Belnap. “The more mass market the offering becomes, the more operationally difficult personalization becomes, and the less customization the sponsor firm can effectively deliver. Yet, the affluent client segment, a sweet spot for direct indexing, still represents a substantial opportunity for sponsors and asset managers to address,” he concludes.
