In The Cerulli Edge Managed Accounts Edition for the first quarter of 2008, Cerulli contends that since the merger of Wachovia and Prudential in 2003, the M&A activity that has had the most impact on the managed account industry has been the decisions by Merrill Lynch and Citigroup to distance themselves from their respective asset management units. One managed account implication of the divorce of distribution and proprietary asset management by Merrill Lynch (sold to BlackRock) and Citigroup (asset swap with Legg Mason) was the increased stress on the use of nonproprietary product in managed account solutions, Cerulli said.
The separation gives more clarity to the objective investment process that drives most managed account programs at the sponsor firms, Cerulli argued in its report.
Since these two asset management deals, the largest deal has been Wachovia’s acquisition of regional broker/dealer (B/D) firm A.G. Edwards in the fourth quarter of 2007. For a merger of this size, Cerulli said, a key characteristic of the combined firm – the number of advisers – directly impacts Wachovia’s positioning of managed accounts as advisers are critical in the delivery of managed account programs. However, when a deal involving advisers is made, there is an expectation that not all of the advisers from the fusing firms will be retained, Cerulli noted.
Advisers are a highly valued commodity of the financial services industry, and acquiring advisers through M&A – due to the time and resources required to recruit advisers – will remain a reason for firms to pursue further M&A activity, Cerulli predicts.
There has also been recent M&A activity where managed accounts benefits are the goal, the report said. These deals are driven by trends in the managed accounts industry and typically involve third-party vendor (TPV) firms that provide platforms, or technology firms that provide specialized services. This type of M&A activity is driven by the requirements behind unified managed account (UMA) platform development – such as overlay management, reporting and billing systems, and product agnostic due diligence – as building out these platforms from end to end is complicated and typically requires multiple firms working in coordination.
Additionally, Cerulli notes, overlay management – which drives the ability to coordinate and execute the trading critical to UMA platforms – is based on a technological foundation which is difficult to build from scratch. Therefore, the focus of recent managed account-driven deals has been around overlay management and enhancing capabilities of servicing managed account clients.
Cerulli contends there will be more deals within the managed accounts space as technology continues to develop rapidly, and TPVs will continue to combine to consolidate both expertise and distribution.
Looking at managed accounts’ growth at sponsors involved in M&A activity in the past six years Cerulli found a generally positive picture of managed account programs post-merger. In three out of the four examples illustrated in Cerulli’s report, the compound annual growth rates (CAGRs) of the combined firms’ programs outpaced the total industry CAGR.
Data on managed account assets by channel during the past six years shows a distinct shift in assets away from the regional channel and toward the wirehouse channel, Cerulli found. Since 2002, M&As have attributed more than $52 billion in managed accounts assets to the wirehouse channel, which controlled more than $1.2 trillion as of year-end 2007.