Third-Party Distribution on the Rise

Third-party distribution has gained share in both the retail and institutional marketplace since 2002—a trend Cerulli expects to continue.

According to a new Cerulli report, in the institutional market, third-party distribution accounted for just 33% of all institutional assets in 2007. However, since 2002 the segment has more than doubled, according to a release about the research. Cerulli pointed to the growing use of third-parties in less traditional institutional markets such as the defined contribution (DC) space. Overall, the growing prominence of third-parties, such as investment consultants, is set to become “an enduring feature of the institutional asset management landscape.”

“The rise of the intermediated institutional sale in recent years has had a tremendous impact on institutional managers, who find themselves dealing with consultants on an increasing basis,” said Billy Hayes, associate director and co-author of the report, in the release.

Private defined benefit is cited as the leading source of new assets in the institutional market. “Unlike retail asset managers, institutional asset managers expect future sources of flows to be roughly similar to past sources,” Hayes said. “Institutional managers generally have enduring legacies in the DB market and still expect future flows to be significant.’”Hayes noted that the emergence of the DC plan as a primary retirement savings vehicle has caught some asset managers off guard as retail firms with experience addressing individual investors have built out highly profitable DC businesses. As a result, he said, more than half of institutional managers said they expect future sales to come through private DC.

In the retail market, the third-party channel accounted for 57.6% of all retail client assets in 2007, and over the previous five years this distribution model gained 10%.

“One clear driver of this trend is the growth of alternative distribution outlets for mutual funds such as mutual fund advisory programs, which are predominantly distributed through unaffiliated third-party advisers,” said Jake Hartnett, analyst and co-author of the report. “However, open architecture has also contributed to the growth as assets have to shifted away from the proprietary channel.”

More than half (57%) of retail asset managers expect third-party distribution to continue to be the foremost sources of new assets—including broker/dealers, registered investment advisers (RIAs), and other third-party platforms, according to Cerulli.

The study is Cerulli Quantitative Update: The State of U.S. Retail and Institutional Asset Management 2008.