U.S professionally managed assets grew nearly 11% year over year in 2020, and boast an 8% 10-year compound annual growth rate, according to a new report by Cerulli.
As a result, the total U.S. professionally managed market opportunity jumped to $59.3 trillion, from $53.5 in 2019.
Yet, while the majority of addressable assets reside in the institutional channel, retail client asset growth has outpaced that of institutional markets consistently over the last 10 years, according to Cerulli’s “The State of U.S. Retail and Institutional Asset Management 2021: Targeting Growth Opportunities” study.
The retail segment of professionally managed assets in 2020 stood at 49% of the total, up from roughly 39% in 2010.
The largest institutional client segments are insurance general accounts ($7.3 trillion), corporate DC plans ($6.9 trillion), and state and local government DB plans ($4.5 trillion). Collectively, these three channels represent more than 60% of the total institutional addressable market, according to the report.
Meanwhile, the two largest retail client segments are retail direct investor platforms at $6.9 trillion and the wirehouses at $5.5 trillion, the report shows. Both channels, according to Cerulli, witnessed 13.7% asset growth in 2020, although the retail direct investor platform channel has been growing faster over the last few years. It holds a 16.8% five-year compound annual growth rate, compared to 9.5% for the wirehouses.
Intermediary Reliance
As institutional investors increasingly seek greater portfolio customization, enterprise risk management and access to co-investment opportunities, they are growing their reliance on intermediaries—investment consultants, outsourced chief investment officers (OCIOs) or financial advisors—to select investment products and/or manage their portfolios, the report observes. “Institutional investors demand more than returns and want an investment partner that exceed performance expectations and more,” says Brendan Powers, associate director at Cerulli.
As of year-end 2020, distribution through third parties—such as BDs and RIAs—accounted for 75% of total retail channel assets, while institutional intermediaries (e.g., OCIO, traditional consulting) accounted for 53% of institutional channel assets. The strongest channel growth occurred among hybrid RIAs (20%) and independent RIAs (16%), the report notes.
And while asset managers are more likely to find success distributing investment products directly to institutions than they are to retail investors, Cerulli suggest that in response to this evolving dynamic, asset managers should consider devoting time and resources toward considering how they plan to address the retail segments. “From platform-level product placements to the introduction and adoption of asset allocation model portfolios, retail channels are increasingly demanding the levels of sophistication and dedicated service formerly reserved for institutional gatekeepers,” Powers emphasizes.
Moreover, even though the fragmented nature of the retail channel will continue to pose challenges, Cerulli believes the opportunities will outweigh the costs. “As commoditization and shrinking fees threaten many market competitors, managers will need to rethink their priorities as retail channels seem poised to account for the majority of client assets in the near future,” notes Powers.
Investment Vehicles
Regarding which vehicles investors are using to access asset managers’ investment strategies, Cerulli observes that while the open-end mutual fund (at 30.9%) and the institutional separate account (at 21.6%) still hold more than half of U.S. professionally managed assets, higher asset growth rates of other vehicles (e.g., model-delivered SMAs, ETFs and CITs) highlight an increasingly “vehicle-agnostic” approach to consuming investment strategies.
Together, open-end and money market funds accounted for $22.6 trillion in assets. And while open-end mutual funds have suffered negative net flows in recent years, Cerulli suggests that managers not neglect this component of their product offering, noting that the vehicle has broad demand across client segments—most notably the retail direct investor platforms (24%), institutions (23.6%), 401(k)s (14.8%) and wirehouses (7.8%).
Meanwhile, CIT growth saw a 19% increase in assets from 2019 to 2020, the report shows. Cerulli further observes that CIT assets grew at a considerably higher percentage increase than the broader DC market, which grew 12.9% in 2020. The firm expects that the low-cost structure of CITs and the ability to negotiate custom fee arrangements will continue to drive adoption in the DC market going forward.
