Cerulli says that unified managed account (UMA) environments will again put sponsors in the position of trainer and educator, as 60% of sponsors reported that their advisors have a low understanding of UMAs. As of 1Q 2006, the managed account industry surpassed $1.5 trillion for the first time. Beyond pure asset growth, managed accounts have enjoyed broadened appeal across intermediary channels, advisor types, and client segments. This proliferation of advice delivery will be further motivated by more complex and appropriate solutions made possible through vehicle-neutral platforms. The next step is to create vehicle-neutral platforms which enable unified managed accounts (UMAs). The success of the UMA environment will be contingent on the centralized, unified structure of the platform support- namely the managed account group (MAG). The most critical factor in the effectiveness of MAGs across the industry is the support they receive from upper management.
One way to develop better advice is to create an environment in which solutions are not handicapped by having to work exclusively with certain investment vehicles. Therefore the vehicle-neutral, or UMA, platform has become a benchmark in the development of next-generation advice offerings. Cerulli splits UMA environments into three models. Model 1 (packaged) will present the most disintermediation from the advisor and investor for the asset managers. The Model 2 (hybrid) arrangement will fulfill the desire of many advisors to have input over the investment management aspect for their client accounts, while still heavily leveraging the MAG and the UMA platform. Cerulli expects that advisors will gravitate toward this model. Beyond the flexibility of advice this model offers advisors, it is foreseeable that many sponsors will also strive toward eventually developing Model 3 (open) UMA capability to cater to special advisor situations or as a place to park investments that are not on their platform (similar to open separate account programs). Eventually, there will be capabilities to allow the distribution and management of client assets in different models concurrently. Cerulli believes having a single environment that governs separately registered UMAs (e.g., trust account, brokerage account, IRA) for a single client is the goal for UMAs.
Next-generation managed accounts will also encourage the spread of managed accounts to new audiences. This means that there will be broader distribution opportunities based on the value of the client relationship. As the platforms become vehicle-neutral, so do the asset managers. It is a recurring theme that managers are expected to supply investment management expertise, rather than products. Cerulli is seeing managers cut back on the number of strategies they offer, and instead increase the packaging in which they will offer the strategies at which they excel. As manager control over packaging gets chipped away, the challenge for managers comes down to internally valuing incremental dollars of assets managed.
While shifting from fixed costs to variable costs is still a very real benefit of most outsourcing, the trend has been for outsourcing for expertise, rather than a cheaper way of conducting business. It is seen more often now that these economical savings may not be realized. This line between homegrown platforms and those that are achieved through outsourcing is blurring because of the unbundling of the platform. With the added complexities and competition of next-generation platforms, even those that are mostly homegrown likely involve third-party expertise. Asset growth in the TPV platform market slowed between 2003 and 2005, even though growth rates maintained double- digit rates. The first quarter of 2006 showed robust growth of more than $20 billion. The growing trend for clearing firms is to add value to the transaction and execution services they have traditionally delivered. Clearing firms are penetrating the broker/dealer workflow-including managed account solutions-in large part by leveraging the broker workstation.
As firms transition to next-generation platforms, TPV platforms will play an integral role, much as vendors did in the proliferation of managed accounts over the past five years. However, the utilization by sponsors will be different. They will build off of existing capabilities and take advantage of unbundled vendor offerings to fill in gaps instead of making a decision between building capabilities and outsourcing to bundled providers. A ramification of unbundling is that the fee has to be unbundled. It may be difficult to price the pieces of an unbundled offering so that it is an equitable fee to what is charged in the bundled arrangement.
Most current UMA environments have a high degree of MAG/home office packaging, with little to no advisor influence on the recommended model. The models are being locked for reasons ranging from platform capabilities to advisor education to fee methodology. Sponsors validated the importance of advice delivery by rating it the most compelling reason for developing a UMA environment. Through better delivering advice, it is expected that increased sales should follow, even if not in a business model that is necessarily more profitable than existing programs. The concept of delivering more complete and flexible advice in a controlled environment is what deserves the most focus as firms pursue their next-generation platforms.