Institutional Assets Held Only Slight Edge On Retail in 2023

Institutionally managed assets have gained a slight edge over retail assets, due to retail having higher exposure to equities, as reported in Cerulli Associates’ “The State of U.S. Retail and Institutional Asset Management 2023” report.

Institutionally managed assets comprised $30.9 trillion at the end of 2022, compared to the $30 trillion making up retail client channels. The market share between the two segments were in parity from 2013 to 2022, according to the report, but diverged in 2022 when a weak equity market led to a larger asset decline for retail assets, as retail investors were more likely to have allocations to equities.

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Cerulli analysts expect that trend to reverse in 2024, not just because of equity market performance, but also due to the growing popularity of retirement plan rollovers into adviser-managed individual retirement accounts. When combined with the increase in pension funds being frozen and terminated, which also will increase the growth of retail assets, retail is expected to grow faster than institutional channels.

Cerulli recommended that asset managers evaluating whether to service retail or institutional clients should foster relationships with the relevant professional buyers who will be making investment decisions. For retail clients, engaging with investment professionals at broker/dealers, banks and registered investment advisers should be a priority. On the institutional side, consultants, OCIOs, RIA retirement plan aggregators and third-party fiduciaries that work with defined contribution plan sponsors should be prioritized.

“Asset managers cannot discount the role that intermediaries hold in distribution and should closely evaluate their sales and marketing resources to ensure coverage,” Powers continued.

Professionally Managed Assets

According to the report, there are $60.4 trillion in professionally managed assets as of year-end 2022. Professionally managed assets declined by 10.2% by the end of 2021, ending that year at $60.2 trillion, as a result of broad declines in the equity and fixed income markets. In 2022, retail client channels fell 11.2% to $29.5 trillion. Institutional assets declined 9.3% to $30.9 trillion.

Cerulli projects that the market split will shift toward retail as plan assets are rolled into IRAs and as corporate defined benefit plans freeze or are terminated. Between 2012 and 2021, the retail market share increased 9.3 percentage points to 49.4% from 40.1 %.

The three-, five- and 10-year compound annual growth rate of retail and institutional client assets were 5.8% and 3.6%, 8.2% and 4.2%, and 8.9% and 5.1%, respectively, according to Cerulli’s report.

Investment Product Vehicles

According to Cerulli, exchange-traded funds and separate accounts are more common with retail clients. Institutional clients have a greater focus on collective investment trusts, commonly among defined contribution plans.

The report found that demand for mutual funds is not decreasing, despite increased demand for other products such as ETFs, CITs and SMAs.

Retail clients own 80% of the $6.5 trillion of assets in ETFs, which are attractive to these clients because of their low cost, tax efficiency and intra-day tradability, according to Cerulli. The consultancy also noted this demand is not being translated to defined contribution plans, which do not encourage intra-day trading. Institutions rarely use ETFs as long-term investments, preferring them for tactical investments or cash management.

Despite a steep decline in assets in 2022, collective investment trusts are the fastest-growing investment vehicles, according to Cerulli. Demand for CITs is driven by their low cost and the ability to negotiate their fees.

CIT assets declined more than 15% in 2022 to $4.6 trillion but have a five- and 10-year CAGR of 8.6% and 8.3%, respectively, and have the fastest inflows of all investment vehicles.

Third-party intermediaries are important for asset managers to build relationships with, to ensure that their retail and institutional clients have access to their products and strategies. For retail clients, this means the availability of platform shelf space and model portfolio inclusion, according to the Cerulli report. DC plan menu inclusion and investment-consultant recommendation lists are sought after by managers with institutional clients.

The size of retail channel assets through third-party retail distributions was $22.6 trillion as of the end of 2022, the last year this data was provided. For institutional clients, this figure was $16.1 trillion. For retail clients, the market share of third-party distributors increased to 76.5% in 2022 from 73.2% in 2017. For institutional clients, this increased to 52% from 46.7%.

Correction: fixes year-end data date to 2022, not 2023.

Arguments for …

Representative Brad Sherman, D-California, said the proposal needs some improvements, but “we need a regulation in this space.” He urged the DOL, as many commenters did, to more clearly exclude educational materials and “hire me” conversations in which an adviser pitches their services to an ERISA plan.

Sherman also entered into the subcommittee’s record a letter written by national retiree advocacy group AARP. The lobby group’s statement supports the proposal, arguing that “when Americans seek out financial advice for their retirement savings, they expect the advice they get will be in their best interest, not in the best interest of their financial adviser. This is very simply what the Retirement Security Rule does.”

The letter also states that “regulatory loopholes allow some financial advisers to recommend that their clients invest their retirement savings in products simply because the adviser will get higher fees and commissions for doing so” and that the proposal “closes a glaring loophole that allows some advisers to offer very bad advice to their clients, as long as they only do it once.”

A representative of AARP did not testify at the hearing.

Kamila Elliott, the CEO and founder of Collective Wealth Partners, testified at the hearing representing the Certified Financial Planner Board in support of the proposal.

She argued that under current law, “financial professionals can be paid handsomely for advice that is not in the investor’s best interest.” She added that “financial professionals should not be allowed to make recommendations that compensate them well but burden the client with excessively high fees, unnecessary risk or harmful illiquidity.”

Elliott noted that CFPB certificants abide by a fiduciary standard, even with one-time recommendations, and are still able to service smaller accounts.

The CFPB has been a supporter of the proposal.

… and Against

Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, who testified at the hearing, sided with Subcommittee Chair Wagner in arguing that the proposal would hurt low-income savers.

Many professionals, he argued, would not be able to work with smaller balances because the costs associated with regulatory compliance and risk would make these smaller accounts no longer worth servicing. He added that “this proposal is not fixable.”

The IRI has been an opponent of the proposal throughout its rollout.

Brad Campbell, a partner in the Faegre Drinker law firm and a former assistant secretary of labor, testified that the DOL was going beyond its authority by regulating IRAs.

“The reason we are here today is that the proposals go well beyond DOL’s limited authority,” Campbell noted in written testimony. “In fact, the proposals would make DOL the primary financial regulator of $26 trillion, approximately half of which is held by individuals in individual retirement accounts and annuities (“IRAs”) rather than employer-provided plans.”

He argued in his remarks that individuals receiving financial assistance from insurance, securities and bank professionals are subject to other state and federal securities and banking regulation.

“If the proposals were finalized,” he testified, “and those individual accounts were subjected to the department’s authority in a manner similar to employer-provided plans, those insurance, securities and bank professionals serving them would now have to comply with a new, highly detailed, and very proscriptive federal regulatory regime led by the Labor Department that would simultaneously apply with—and in many cases, materially conflict with—the requirements of their ‘normal’ state insurance regulation, state and federal securities regulation, or state and federal banking regulation.”

The DOL has not yet announced a timetable for finalizing the proposal.