Sponsors Rediscover Proprietary Asset Management

April 22, 2020 — Boston

After exiting the asset management space, sponsors look to re-enter market

Sponsors are showing renewed interest in creating home-grown asset management solutions, according to the latest The Cerulli Edge—U.S. Managed Accounts Edition. This renewed interest in proprietary asset management solutions reflects sponsors’ desire to seek new sources of revenue as fees decline.

In the early years of the separately managed account (SMA) industry, proprietary products were popular on broker/dealer platforms, and asset managers were conscious of the need to compete against in-house solutions. This changed in the mid-2000s, when major sponsors divested themselves of proprietary SMA business lines. Since then, the financial services industry has embraced open architecture, allowing a plethora of third-party asset management products to flourish on their managed account platforms.

The decision to restart the development of proprietary product is driven by a desire for centralized oversight of advisor-managed portfolios. Home offices want greater control over portfolio management to reduce the variability of returns that come from portfolios managed by advisors on behalf of investors. Cerulli’s research shows that a majority (57%) of managed account sponsors anticipate that home-office discretion will increase during the next three years.

Additionally, the role played by centralized investment groups at home offices in the creation of proprietary asset allocation models of exchange-traded funds and mutual funds has emboldened these groups to extend their reach into SMAs. Many are beginning to incorporate SMAs inside these proprietary models.

However, according to Cerulli’s Tom O’Shea, director, the biggest motivation for rolling out in-house SMAs is the desire to participate in asset management revenue. “The whole value chain for the delivery of financial services—from custody and clearing, to due diligence and asset allocation, to asset management and financial advice—is undergoing fee compression.” He adds, “Distributors, which control the client, have the most power in this value chain and they can use it to move into the asset management space to capture additional revenue.”

In entering this space, sponsors are returning to the mid-2000s, when clients were concerned about conflicts of interest. O’Shea suggests firms develop a clear strategy to mitigate these conflicts: “Distributors will need to make sure that their products are priced competitively and address a client’s needs as well as, or better than, a similar product from a third party.”

Note to editors

These findings and more are from The Cerulli Edge—Managed Accounts Edition, 1Q 2020 Issue.

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