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Distributors Urged to Consolidate Managed Account Units


Over the last 2-1/2 years, fee-based managed account assets have soared by $500 billion, and as their star continues to rise, experts say the sponsors that best consolidate their managed account operations to deliver a consistent and understandable message to advisers will reap the greatest rewards.

Unfortunately, a new study from the Boston-based research firm Cerulli Associates reveals, many managed account groups remain splintered units, typically forced to borrow services from elsewhere within the organization, or to seek help from outside vendors.

Given the more than $1.3 trillion in assets that managed accounts command, that's somewhat surprising, said Jeffrey Strange, a Cerulli analyst and author of "Managed Account Groups: Impact on Future Distribution."

Managed account groups are also poised to gain even greater importance within the organization in coming years, he said. To date, the ascent of the managed account group has been on the strength of IRA and 401(k) rollovers. As the nation's 70 million Baby Boomers enter retirement, those rollovers will only multiply.

In addition, the industry is gravitating further away from a transaction-based commission business, to one that embraces the more compelling revenue model that a flat fee provides. So, as fees continue to fall and as technology advances, managed account groups will be more capable of going down market.

The managed account group model is also evolving into one that it can take a more prominent, portfolio-construction role. That's because recent regulatory action has moved asset manager selection away from a subjective process where asset managers put forward soft dollars to curry favor, to one where the selection is more institutional in nature.

"Selection is becoming more quantitative, more objective," Strange remarked. "Firms are looking more at the technical side of managers."

Taken together, these factors suggest that the time is now to consolidate the personnel organizations and distribution strategies of managed account operations, and to put an end to the mixed messages that advisers are receiving.

And according to Strange, advice is the most crucial component of the managed account platform. Although the financial consultant sits face-to-face with the client, it's the managed account group at the intermediary, or "home office," that is tasked with delivering the information to the adviser to support the investment solution.

That information, however, shouldn't amount to a data dump, Strange warned.

In fact, the greatest hurdle managed account groups face, he said, is educating and not alienating the adviser. It's a common refrain heard these days, he admitted, but one that cannot be repeated often enough when it comes to managed accounts, because advisers will be receiving proprietary information from the home office, as well as information on investment decision-making from asset managers that might come aboard a particular managed account platform.

"Advisers just have so much going on these days, sometimes they'll just tune you out," Strange explained. "For years, they've been told that they need to be telling their clients about alpha and beta, but now they're being told that they just need to understand the investment process of the managed account group - the research, the due diligence.

"A centralized, managed account group will get you to a unified voice," he added. "In other words, they'll say to the adviser, You guys are on the ground and know what these people need. We're not going to give you every product under the sun, but based on the profile of this client, here's what we recommend, and you can tweak it however you want."

Of the firms polled by Cerulli that are centralizing their managed account operations, just 25% maintain a profit-and-loss measurement. That's rather alarming, Strange said, given the increasingly important role they are playing within the organization. Although those firms reported that their managed account groups have distinct goals - such as gaining a particular degree of assets or a certain number of accounts - the all-important, revenue yardstick doesn't exist. Instead, many firms consider their managed account group mere "utilities" that simply support the fee-based business.

"We think the managed account groups should have some revenue attributed to them so that firms know they're making the right investments, in terms of technology and people," Strange said.

The reluctance to invest in managed account groups, Cerulli found, can be traced to several factors, First, there's a great deal of noise surrounding new products - like exchange-traded funds, multiple style-accounts and unified managed accounts. As a result, many firms are unsure what steps to take to harness their growth. And then there's the unified managed accounts technology, which is struggling to catch up.

But that's the great merit of a centralized managed account group, Strange observed.

"The next stage will likely be a unified managed accounts environment, so it doesn't matter what type of programs or products you pursue right now, because you'll have this orientation where you can plug in anything," he said. "And having a unified managed account culture is almost as good as having formalized, unified managed account technology."

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