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"Direct providers realized the need to develop greater guidance and advice services to capture a larger slice of their clients' long-term portfolios," said Katharine Wolf, associate director at Cerulli Associates. "As such, these providers began developing managed account programs that offer their clients on-going investment management for an asset-based fee and are engineered to appeal to advice-seeking clients."

With the development of managed account programs, direct firms no longer exclusively serve self-directed clients and are increasingly courting clients who want professional advice and guidance. In the past, investors may have looked outside of their direct providers for advice, but increasingly, direct providers are able to keep assets and clients on their platforms through their managed account offerings.

The largest direct providers, Fidelity and Schwab, have well-developed managed account programs, with $102 billion and $59 billion in managed account assets, respectively. Other providers, such as E*Trade, TD Ameritrade, and TIAA-CREF, are in the nascent stages of advice delivery, with less than $5 billion in managed account assets apiece.

Wolf contends that direct providers face two main challenges in growing their programs. First, they must retrain or hire representatives to position and service the programs. Second, those direct firms with a history of catering to active traders must reframe themselves as advice providers. Admittedly, direct firms still struggle to be viewed as advice providers and their managed account adoption rates range from less than 1% to around 13% of clients.

Direct firms have an advantage in positioning managed account programs, however, in that they have a wide base of clients from which to prospect: 67% of all investing households maintain a direct account. Therefore, even small increases in managed account adoption rates can lead to solid growth in the direct firm's managed account programs.

"In my view, direct firms have a number of tailwinds for their managed account programs," says Wolf. "Not the least of which is that their model allows them to profitably offer advice to clients at lower cost than many other advice providers."

Indeed Wolf estimates that the direct channel will grow to $4.9 trillion by year-end 2014, and managed accounts will make up an increased share of direct firms' assets, growing from 4% to 8% of assets over that timeframe and offering opportunity for asset managers distributing through direct managed account programs.

Additional findings from Cerulli's latest managed accounts research include:

• While the four wirehouses remain the largest channel in terms of managed account assets, other distribution channels are steadily eroding wirehouse marketshare. Cerulli contends, however, that the considerable infrastructure supporting wirehouse managed account business ensures that these firms will maintain their place as the dominant channel in the space.
• Regional B/Ds are poised to capture significant marketshare in the managed account space over the next two years. Asset managers have an opportunity to capitalize on this trend by dedicating resources to regional B/Ds with major growth potential even if their advisory assets are currently small.
• IBDs hoping to attract new advisors to their firm need to make sure that they have a robust fee-based offering to solve for the varying needs of advisors.
• Though client accounts at RIA practices have many of the same characteristics of managed accounts (fee pricing and asset allocation at the core), these advisors are not broad users of managed account programs.

Cerulli

Press Release

BM