MMI Reports Investment Advisory Solutions Assets Dropped 5% to $4 Trillion in Third Quarter

Decline Attributed to Market Falloff; Net Flows Were Positive for All Market Segments 

Highlights of the 4Q 2015 edition of MMI Central include:

After 15 consecutive quarters of positive growth dating back to the third quarter of 2011, this is the first quarter that the industry has experienced a decline in total assets – a decline that is mainly attributable to a market slump in which the S&P 500 fell 6.4% during the quarter. Assets in each of the principal IAS market segments were lower than in the second quarter, as the rate of contraction by segment ranged from roughly -4.1% to -5.5%. 

Source: Money Management Institute, Dover Financial Research
Source: Money Management Institute, Dover Financial Research

Because many IAS programs have been increasing bond allocations in recent quarters, the decline in IAS assets was less than the drop in global equity markets. For example, Separately Managed Account (SMA) assets fell the least on any segment because of their heavy fixed income component.


Source: Money Management Institute, Dover Financial Research 

 

While third quarter net flows of $32 billion were approximately 50% lower than the prior quarter, all IAS segments posted positive flows in the third quarter.


Source: Money Management Institute, Dover Financial Research 

The quarterly net flow trends are indicative of an industry in transition as the consolidation of platforms appears to gather momentum and firms, financial advisors, and clients all increasingly see the benefits of consolidating different types of investments in a single custodial account in which assets can be managed holistically. Unified Managed Account (UMA) net flows exhibited continuing strong growth of $12.4 billion during the quarter, while SMA net flows declined dramatically to $1.9 billion, and Mutual Fund Advisory (MFA) net flows reached a recent low point of $3.7 billion. In addition, net flows into Rep as Advisor (RAA) accounts, a nondiscretionary fee-based account model, continued to trail off at $1.1 billion for the quarter while Rep as Portfolio Manager (RPM) net flows of $12.5 billion represented nearly 40% of total IAS net flows for the period – indicative of the appeal that the discretionary nature of RPM programs has for advisors looking to exercise more control over portfolio construction. 

Five-Year 10% Annual IAS Asset Growth Forecast Appears on Track Despite 3rd Quarter Decline

Although IAS assets declined 5% in the third quarter, the 10% annual IAS asset growth rate predicted through 2019 in an MMI survey of sponsor firms published in the 2015-2016 Money Management Institute Industry Guide to Investment Advisory Solutions appears to still be on track thanks to strong market appreciation in October and November If this recent market momentum continues, IAS industry assets are expected to reach, as forecast, $4.4 trillion by year-end 2015 and $6.4 trillion by the end of 2019. 

In what has become an annual survey, sponsor firms are asked to provide industry trend information and five-year growth rate estimates for the overall IAS market and each of the major IAS market segments.  The projected five-year annual growth rates for the individual market segments were UMA 18%, RPM 12%, MFA 8%, SMA 8% and RAA 6%. Here, too, the data points to an evolving industry. The strong UMA growth rate projection comes at the expense of standalone SMA solutions as the assets and net flows linked to those programs continue to migrate toward the UMA model. In addition, some sponsor firms, mainly wirehouses, have begun transitioning mutual fund advisory assets to UMA platforms. The popularity of RPM programs and the slowing growth of RAA programs can be attributed to advisors’ desire to exercise discretionary control over client assets, and total RPM assets are likely to continue to grow at a healthy pace. When sponsor firms add RPM sleeves to UMA platforms, standalone RPM assets are expected to begin transitioning to UMA platforms – as is happening with standalone SMA and MFA assets. 

Survey respondents cited six major trends currently shaping the future course of the IAS industry: the advent of “robo advisors,” the ongoing adoption of goals-based wealth management, platform consolidation, the growth of exchange-traded funds and related shift towards passive investment products, and growing regulatory pressures.