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Clients Will See Changes in Managed Accounts Due to DOL Rule

Managed account providers are focused on platform consolidation and expect fees to decline.

By Rebecca Moore editors@plansponsor.com | June 06, 2017
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The Department of Labor (DOL) fiduciary rule is affecting how managed account providers think about discretion, and it is shining a light on the risk associated with poor investment outcomes, according to a report from Cerulli Associates.

Platform consolidation has re-emerged as the top initiative for managed account providers, with 59.6% of those surveyed identifying it as their firm’s most important priority for 2017. Most firms anticipate completing their consolidation within two years, but a significant number (35%) acknowledge that the project may require more than two years’ work.

“Under the rule, it is risky for firms to knowingly allow sub-par advisers to manage underperforming portfolios for clients when a better performing portfolio with a similar risk level is available from the home office," notes Tom O’Shea, associate director at Cerulli. “Most of the executives interviewed by Cerulli believe that home-office discretion will increase as underperforming advisers are identified and gently coaxed into portfolios created by the headquarters consulting group. 

Still, a sizable minority of managed account firms do not plan to unify their managed account programs. Nearly one-quarter (24%) will continue to allow their products to exist on different platforms. If these firms persist in their plans to maintain separate managed account platforms, asset managers will confront a hybrid distribution environment where some providers have different platforms and others have a single consolidated one.

In 2016, managed account assets grew 13.0%, rebounding from an anemic 3.4% growth rate the year before and improving from $4.1 trillion to nearly $4.7 trillion. Unified managed accounts (UMAs), which exhibited a 21.6% rise in assets, are the second-fastest growing product category, surpassed only by exchange-traded fund advisory (ETFA) programs, which grew assets 33.5%.

Also in 2016, executives who oversaw managed account programs were distracted by two major concerns: how to respond to the rise of “robo” advisers, and the changes required to conform to the DOL fiduciary rule. Changing regulations—primarily the DOL rule—and the creation of a digital advice platform ranked No. 1 and No. 2 on the list of priorities of managed account providers, with platform consolidation in the No. 3 spot. In the 2017 survey, consolidation regained its place as the top priority of managed account providers.

Providers seeking to consolidate their managed account products acknowledge that they require significant time to complete these projects. One-fifth (22%) of providers believe they will complete their consolidation in six to 12 months. Just less than half (43%) anticipate these efforts taking one to two years, and one-third (35%) predict consolidation efforts will require more than two years.

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