Fund Managers Use Institutional Shares to Stay Competitive

Cerulli Associates' latest managed accounts-focused research indicates mutual fund advisory programs (MFA) will experience slower growth in the coming years.

According to The Cerulli Edge: Managed Accounts Edition, 1Q 2011, in an effort to capture additional opportunities and combat the variables driving slower growth in MFA programs, firms are focusing on share class pricing.  

Cerulli found that MFA programs have become the single greatest source of new asset flows through managed accounts for asset managers. Cerulli estimates that assets in MFA programs will surpass $1 trillion by year-end 2014. This includes the expectation of $260 billion in total net flows during the next four years and equates to a CAGR of 14.5% for that time period (which can be compared to a 15.8% CAGR over the last five years).   

According to Cerulli, the variables driving this slower growth include: 

  • Increasing use of rep-driven programs and unified managed accounts (UMAs); 
  • Decline in the proportion of assets that transition from DC plans to IRA rollovers (as IRA rollovers have long been an important source of assets for mutual fund advisory programs); and 
  • Increasing use of ETFs in rep-driven programs.

Cerulli's research indicates that 72% of MFA programs currently use institutionally priced share classes. In addition, 77% of MFA program sponsors believe that fund managers will need an institutional share class to be competitive in the next three years.   

Institutional share classes often have a lower expense ratio, primarily due to 12b-1 or distribution fees being stripped out, the study explains. Cerulli views the shift to share classes without 12b-1 fees as a progression the industry is undertaking that won't occur overnight, and some programs will not move away from using 12b-1 share classes unless compelled through regulation.    

"Accessing the broadest spectrum of managed account program distribution will undoubtedly be facilitated by offering share classes built for advisory platforms and without 12b-1 fees or trailers," the report says.