“Free” Asset Allocation Models Threaten U.S. Third-Party Strategists

“Free” Asset Allocation Models Threaten U.S. Third-Party Strategists


September 2018, Boston. In 2018, asset managers launching asset allocation models without explicit strategist fees emerged as a new trend in the U.S. managed account industry. According to a new report from Cerulli Associates, a global research and consulting firm, titled U.S. Managed Accounts 2018: Asset Allocation Models & Platform Consolidation, these “free” asset allocation models, subsidized by expense ratios of proprietary funds, threaten to displace third-party strategists, which typically charge 15 to 25 basis points for strategic asset allocation models.

“Related to the rise of ‘free’ strategists is the emergence of asset allocation model marketplaces,” explains Tom O’Shea, director at Cerulli. “These allow allocation strategists a way to distribute their models to advisors outside of turnkey asset management providers (TAMPs) and managed account sponsors. Unlike TAMPs, marketplaces do not charge a platform fee, so they appeal to cost-conscious advisors.”

“As clients become more sensitive to the total cost of a portfolio, advisors are searching for ways to reduce the component costs of owning a managed account without jeopardizing their own advisory fee,” says O’Shea. “Some industry observers speculate that these ‘free’ portfolios will meet resistance because clients will look suspiciously at strategies populated by funds created by the strategist. Yet, these portfolios often contain passive exchange-traded funds (ETFs) and mutual funds.”

Cerulli is seeing managed account sponsors and strategists partnering. Headquarters consulting teams have become open to collaborating with third parties recently. Nearly three-quarters (70%) of executives at managed account sponsors indicate that their firms will work with third-party strategists, and half of this cohort (35% of total respondents) is looking to expand the number of strategists they make available to advisors.

Mutual fund and ETF providers have traditionally left the role of creating asset allocation models and selecting funds to third parties, but big fund shops are invading the strategist space, threatening third-party strategists with their zero-basis-point asset allocation models. Nearly one-third (30%) of executives at asset management firms indicate they will “offer asset allocation model portfolios for free.”

“This year, the managed account industry is grappling with familiar issues such as platform consolidation and the lingering effects of the Department of Labor Conflict of Interest Rule,” continues O’Shea. “One important impact of the defunct regulation is the industry-wide platform rationalization prompted by sponsors wanting to strengthen their due diligence efforts, which has narrowed the distribution opportunities for advisors.”

Cerulli’s latest report, U.S. Managed Accounts 2018: Asset Allocation Models & Platform Consolidation, provides a comprehensive overview of the U.S. managed account marketplace, including business practices, industry economics, fee and regulatory trends, and developments in product design and delivery. In addition, it details market sizing and growth projections, as well as the growth of various product types in the managed account space.

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