In response to financial advisors’ increasing desire to capitalize on an improved client experience and remain competitive, asset managers are launching a new wave of separately managed accounts (SMAs), a new report finds.
According to the second quarter 2021 issue of The Cerulli Edge―U.S. Managed Accounts Edition, many of the assets that were formerly directed to mutual funds have moved into exchange-traded funds (ETFs), but SMA products have increased steadily as well, with advisors planning to further enhance allocations during the next two years. Data from the report shows that advisors anticipate decreasing the use of mutual funds by 12% by 2022 while increasing the use of separate accounts by 19% and ETFs by 18%.
Separate account programs also saw a 34% year-over-year growth rate from the first quarter of 2020 to the first quarter of 2021, and now comprise about 16% of the $9.1 trillion managed accounts industry. Asset managers, in turn, have taken notice. Cerulli notes that during the past two years it has observed a wave of managers launching SMAs, attempting to capitalize on mutual funds seemingly falling out of favor and SMAs claiming a greater share of assets and interest from financial advisors.
These new managed account offerings are aided by advisors wanting to deliver a great degree of customization for their clients, an objective that is best achieved through the SMA wrapper, the report suggests.
There are also opportunities for advisors to take advantage of tax-loss harvesting within a SMA portfolio or to capitalize on other customization trends, such as incorporating environmental, social and governance (ESG) factors. Advances in managed account technology have also boosted SMAs down market, allowing advisors serving investors across wealth tiers to implement these products with their clients.
Cerulli notes that in March, Voya announced a partnership with Morningstar Investment Management to launch managed accounts for financial advisors, with Voya serving as the recordkeeper on the accounts and Morningstar technology giving advisors the platform. The report observes that previously Voya had only offered managed account solutions to plan sponsor clients, with the new venture being its “first foray” into offering managed accounts to advisors, although these products will still be primarily retirement-focused.
In July 2020, WCM Investment Management, an affiliate of Natixis Investment Managers, launched five new retail SMAs. Financial advisor demand was one of the key factors that WCM cited in its decision to pursue managed account solutions, the report notes.
And in late 2019, Putnam Investments, which had shuttered its managed account business due to lack of demand in the wake of the 2009 financial crisis, announced that it was bringing back its managed account products after a decade-long break. Cerulli notes that when announcing these new products, executives at asset managers touch on similar rationales: “asset managers want to stay competitive and one of the best ways to do so is to give advisors and home offices maximum vehicle flexibility.”
Cerulli further suggests that asset managers developing model-delivered separate accounts will likely find a receptive audience among managed account sponsors. A 2020 survey by the firm found that 41% of managed account sponsors were interested in adding model-delivered separate accounts to their platform from outside asset managers; this was tied for the second-most popular product solution, along with strategic asset allocation model portfolios and income solutions.
“With their cost-effectiveness, and the improved client experience of the unified managed account, we anticipate that this demand for model-delivered products will continue to garner interest from sponsors, and asset managers will continue to find a friendly market,” says Matt Belnap, senior analyst at Cerulli.
However, while financial advisors and their clients may be poised to leverage SMAs in coming years, Cerulli notes that launching these products is not a panacea for asset managers. As more asset managers expand their managed account offerings and capabilities, any residual differentiation benefit fades.
“Asset managers must work to distinguish their offerings, now in an increasingly crowded marketplace,” adds Belnap. “Fees will continue to compress, as sponsors and advisors push to squeeze additional basis points out of their asset management partners. Asset managers must work to make sure their technology is continuously up to date, and stay on top of new trends and developments, such as direct indexing.”