The Markets December 20, 2017

Employers Should Shift Perception of Managed Accounts

Research from Cerulli Associates finds plan sponsors must position managed accounts as a service, in order to change its costly product reputation.  

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As managed accounts continue to progress in the 401(k) industry, latest research from Cerulli Associates finds this unique investing strategy can see further development in 2018, with the use of proper participant awareness.

 

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Despite its growing popularity, the fourth quarter issue of The Cerulli Edge reports that managed accounts have been scrutinized for higher costs—in comparison to alternative strategies—and low transparency. Since managed accounts have such high customization—personalizing a participant’s retirement future based on specific needs, fees tend to be pricier, along with other challenges. Cerulli suggests that if sponsors position managed accounts as a valued service with benefits including customization and personal advice, then apprehensions could simmer.

 

“A study by the Government Accountability Office indicates that managed accounts users tend to have higher savings rates and better diversification,” says Onkita Ganguly, an analyst at Cerulli. “A managed account takes into consideration that each account holder’s financial situation is different, whereas target-date funds [TDFs] are based on anticipated retirement age, with no customization.”

 

Additionally, Cerulli says these higher fees, along with the challenges surrounding an unclear benchmarking performance due to elevated customization, can label managed accounts in a sort of “black box.” To lessen these obstacles, Cerulli recommends plan sponsors position the strategy as a service.

 

“As an investor ages and their financial situation becomes more complex, he or she is more likely to seek a financial representative for advice,” says Tom O’Shea, an associate director at Cerulli. “When advising a retiree to roll over 401(k) assets, advisers should convey to investors the benefits of personalization available with managed accounts to address their questions about fees.”

 

Information about purchasing the fourth quarter 2017 issue of The Cerulli Edge—U.S. Managed Accounts edition can be found here.

Data & Research December 20, 2017

RIAs Lowering Fees by 20 to 30 Basis Points

They are making the move to become more competitive in light of the fact revenue growth has slowed to 7%.

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Registered investment advisers (RIAs) are taking several steps to become more competitive in light of the fact revenue yield has dropped three basis points (bps), revenue growth is now a sluggish 7%, and client growth is a mere 5%, the lowest level in five years, according to Fidelity Clearing & Custody Solutions.

As a result, 64% of RIAs are offering discounts on their fees ranging between 20 and 30 bps. Many are also unbundling their fees, 33% are looking to offer a digital solutions within the next 18 months, 41% are currently considering or are already using a digital solution, and 57% more RIAs have made client segmentation a priority. Forty-nine percent said that investing in new technology is a priority.

Fidelity learned that digital solutions help RIAs become far more productive, as those with a digital solution have three times the number of clients (566 versus 202), 2.5 times higher assets ($533 million versus $209 million) and three times the revenue ($4.2 million versus $1.4 million)

“While discounting can contribute to revenue yield erosion, some erosion can be expected against the backdrop of new strategies increasing scale and driving down the cost of business,” says David Canter, head of the RIA segment for Fidelity Clearing & Custody Services. “With revenue and client growth dropping, RIA firm leaders will have to ensure that they make up in volume what they are discounting in fees. Discounting could signal that RIAs are bridging to the practice of unbundled fee structures, which may help attract fee-sensitive clients, align services with value and protect against the commoditization of investment management.”

Fidelity also discovered that mid-size and larger firms are more likely to be discounters, with 79% of RIA firms with between $500 million and $999 million in assets offering discounts, compared to 57% of firms with $50 million to $99 million in assets.

Across firms of all sizes, the average discount is 21 bps, but for firms with more than $1 billion in assets, RIAs are offering discounts of 28 bps. Fidelity also learned that for clients with $2 million or more in assets, discounters set their fees 10 to 15 bps higher, but then negotiate lower costs.

Fidelity also learned that RIA productivity is at its highest level in five years, with assets under management per client remaining steady at $1.1 million. Assets per adviser and clients per adviser are also up 11%.

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Fidelity’s full report can be downloaded here.

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