Making the Transition from Institutional to Retail: How Institutional Managers Can Succeed with Retail SMAs

In fact, according to estimates from a recent Cerulli report, separate account programs grew 34.1% from 2019 to 2020 and are expected to grow 42.9% over the two years ending 2021. Separate accounts within unified managed accounts (UMAs) are estimated to have grown 71.4% over one year, and 64.7% over two.¹

Why the attraction? For starters, transparency. As technology has changed our market environment, investor expectations have changed as well. In a world where almost any kind of information – from weather conditions to the status of package deliveries – can be accessed instantly from the phone in our hands, we have become accustomed to getting data fast. If you can get continual updates on a $100 Amazon order, why shouldn’t you be able to access timely information about a $100,000 investment?

Then, of course, there’s fees. For advisors and clients, SMAs offer a more cost-effective way to access high-quality asset management. Put the two together – transparency and fees – and you have a winning combination.

So where does that leave institutional asset managers?

Opportunities to embrace, obstacles to overcome

Until recently, there was a rock-solid rationale behind the lack of institutional asset manager interest in serving retail markets: When you can make one significant sale with an institution, why meddle with multiple retail accounts to achieve comparable results?

But that rock has been blasted. According to Mark Spina, COO and President of FLX Distribution, a distribution platform connecting asset managers, wealth management firms and advisors: “The evolution of advisor and intermediary markets makes today’s retail feel more institutional in nature.” Just as asset managers have been accustomed to pitching research teams at institutions, today they are making comparable approaches to broker/dealer firms and TAMP platforms. “The review process for determining whether or not an institution or a wealth management firm is going to utilize an asset manager’s portfolio is quite rigorous,” said Spina. “I think institutional managers have identified the convergence of these markets.”

At the same time, technology has evolved to make product distribution easier. Managing many accounts is daunting. But with current technology, asset managers can make one transmission of an SMA model or investment product that goes to a wide range of firms and advisors efficiently.

“So now you have the commonality of markets and a simpler, easier way to scalably do business with what was once a more fragmented market,” observed Spina. “Again, by putting two positive forces together, it leads to abundant and still growing interest in this space.”

Yet the commonality between institutional and retail markets breaks down after the initial approval by the research committee. In the institutional world, approval is complemented with a funding mandate; in the retail world, acceptance by a sponsor or platform is just the beginning of the sale. “In the advisor or intermediary space the model is now available to advisors, but remains unfunded,” Spina said. Further, the asset manager’s investment products are now surrounded by competing models and products, each seeking advisor interest.

“It may be the right thing to enter the retail market,” said Spina. “But it’s operationally daunting. So the other key trend is to look for operational support, particularly with distribution.”

Succeeding in retail – at scale

Because the retail markets involve more partners and portfolios, there are simply more moving parts than the institutional business, imposing more back-end work for asset managers.

“If you want to embrace new retail opportunities in a profitable way – while mitigating risk – you need the ability to scale without overwhelming your staff or overburdening your operations, distribution support teams and marketing teams,” said Ryan Carter, Senior Vice President, Vestmark Outsourced Services.

In particular, Carter noted, asset managers must be prepared to face a number of challenges, including:

• Scalable account-level tax management and tax-lot accounting, one of the primary drivers of interest in contemporary SMAs
• Seamless integration with centralized connectivity and established processes for all distribution partners
• Ability to centrally manage, trade and track accounts with the power to fulfill performance calculations and composite management across multiple sponsor programs and relationships

Carter’s colleague, Steve Camp, Managing Director, Vestmark Advisory Solutions, explained: “The issue isn’t just about your internal infrastructure: it’s about speed. Even if you have the money and resources to build your own applications and expand your teams, you’re talking about many months, maybe even years, before you get off the ground. That’s a lot of lost opportunity, especially in rapidly evolving markets.”

As Carter says, “Why reinvent the wheel when you can rent one?” Outsourced technology and services can provide the backend, while asset managers concentrate on what matters most: creating, managing and promoting quality investment products.

Carter and Camp advise seeking support in three key areas: technology, operations and distribution. “You want proven technology that enables connectivity to all your partners and advisors, while facilitating all the tough calculations – for rebalancing or tax management – at scale, fast.” said Carter.

Operations expands beyond technology to include talent. Camp advises managers to look for teams that have been through this rodeo before. “You’ll save time and money by leveraging the expertise others have acquired through experience,” he said.

Distribution, in the retail environment, means building one-on-one connections with the individual advisors who can access your products on the platforms you have entered. “You’re going to need a combination of traditional salesmanship and digitally-enabled contemporary thought leadership,” said FLX’s Spina. “The goal is to elevate yourself above the noise of a crowded platform, and start building the relationships that lead to funding – ones that can also grow over time.”

“The opportunities for institutional asset managers in the retail space are very real,” concluded Camp. “But so are the challenges. Given the complexity of the terrain, it makes sense to take the journey with partners who can assist you in growing your business: provide the technology, operational depth and distribution savvy to help make your transition less risky and more successful.”

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¹ The Cerulli Edge: U.S. Managed Accounts Edition, 2Q 2021, Issue #80, p.8