In 2003, the aggregate amount of assets held by asset managers participating in the separate account industry showed a skew toward institutional assets. Seven years later, the assets are more the realm of retail mutual fund managers.
Cerulli’s says in its latest U.S.-focused monthly publication: “The most obvious reason for this shift is costs. It’s difficult for an institutional manager to justify the lower fees and lower account balances that are typically received from subadvisory separate account programs. Alternatively, retail-oriented asset managers, also successful at distributing higher margin mutual funds, can look at the revenue from the whole sponsor relationship as a blended fee (essentially offsetting the lower-margin separate account business).”
However, the recent growth that dually-registered programs have experienced represents renewed opportunities for institutional managers. These programs have become favorable amidst adviser movement, model portfolio pressure, and the need for customization.
Boutique institutional asset managers that wouldn’t build operational support for subadvisory programs and won’t submit model portfolios should now look at dual-contract programs as a channel, Cerulli said. These managers likely have expertise around building unique products (e.g., liability-driven investing) that can be distributed through a dual-contract arrangement where they are working with larger client account sizes and can leverage their existing sales and relationship management structure.
The publication suggests that for separate account programs to once again flourish, it will take increasing customization of the solutions, and again embracing the program’s roots in institutional managers. Cerulli contends managers have a symbiotic relationship in this endeavor, as their efforts to differentiate themselves should also advance the goals of the broker-dealers, namely serving larger clients with more customized solutions.