MMI Central 1Q 2016 Summary - Investment Advisory Solutions Assets Rose 3.1% to $4.1 Trillion in 2015

All Market Segments Post Asset Gains in Fourth Quarter Recovering from Third Quarter Contraction

MMI Central 1Q 2016 reports a 3.1% rebound in IAS assets to slightly over $4.1 trillion during 2015 compared to a 1.3% rise in the S&P 500. This edition of Central also offers a special Dover Financial report, Disrupting the Robos: Platformization and the Digital Delivery of Advice, that examines the potential opportunities that sponsor firms have to disrupt the current generation of robo advisors by leveraging their sophisticated advisory-based platforms.

Three core trends influenced quarterly and full-year IAS results – weakening investor confidence, an ongoing multi-year global shift toward fixed-income investments, and the continued strong performances of Unified Managed Account (UMA) and Rep as Portfolio Manager (RPM) programs. Confronted with increased market volatility and still suffering from lingering post-crisis jitters, investors are increasingly focusing on wealth preservation. At the same time, a growing concern over the value of active equity management continues to drive more assets into fixed-income and passive products. UMA and RPM, which have by a substantial margin been the strongest performing market segments over the past four years, have become key factors in IAS asset flows and growth.

Exhibit 2 IAS Assets by Market Segment
Source: Money Management Institute, Dover Financial Research

In a fourth quarter recovery, IAS assets rose 3.2% following a 5% third quarter decline. For both the full calendar year and the fourth quarter, all IAS market segments experienced growth in assets in sharp contrast to the modest declines across all segments in the third quarter of 2015.

For the full year, UMA and RPM programs posted healthy gains of 24.4% and 5.0 % compared to the S&P 500 return of 1.3%. By contrast, Mutual Fund Advisory (MFA) assets declined 2.5% while Separately Managed Accounts (SMAs) and Rep as Advisor (RAA), a nondiscretionary fee-based account model, had gains of 1.4% and 0.1%.  

During the fourth quarter, despite market volatility, IAS assets grew steadily as many IAS programs have continued to increase bond allocations. The result was relatively more diversified asset allocations which, in turn, helped mute the impact of volatility. Of the nearly $130 billion in quarterly IAS asset growth across all market segments, only UMAs matched the 7% gain posted by the S&P 500 in the fourth quarter. Second was RAA at 3.8%, while RPM, SMA, and MFA programs ended the quarter with increases of 2.9%, 2.7% and 1.8%, respectively.

IAS net flows were $168.8 billion for the year down from $290.3 billion in 2014. UMA was the only segment with a year-over-year increase in flows, moving from $45.3 billion in 2014 to $65.6 billion in the year just ended. RPM was second in net flow volume at $62 billion, down from $105.4 billion in 2014. MFA, the biggest loser, dropped from $69.1 billion in 2014 to $6.1 billion, and SMA and RAA fell from $40 billion to $25.1 billion and from $30.4 billion to $10 billion, respectively.

In the fourth quarter net flows totaled $11.2 billion with UMA programs leading the way with $13.3 billion in flows, dwarfing the other segments. RAA grew by $5.4 billion, and RPM programs had $1.7 billion in net flows. Mutual fund advisory programs, the only segment with negative flows, had net outflows of $9.5 billion while SMA and ETF Advisory showed small gains.

“The relative strength of UMA and RPM flows over the past year confirms that both investors and financial advisors continue to gravitate toward solutions that provide disciplined asset allocation strategies in the convenience of a single-account format,” said Craig D. Pfeiffer, MMI President and CEO. “These particular programs also provide financial advisors with the automated tools they need to react quickly in periods of market volatility. Empowering the financial advisor to make timely adjustments across client portfolios is critical to their ability to help investors stay the course through inevitable market ups and downs.”

Two observations:

  • From 2014 to 2015 there has been a 16% rise in the number of IAS accounts and roughly an 11% decline in average account size. This is perhaps indicative of new investors, including Millennials, with smaller asset bases entering the market in search of investment advice and Boomers who are already in retirement ceasing to make new investments and beginning the drawdown phase of their investment cycle.
  • Evidence of the shift away from equities toward fixed income: from 2008 to 2015, the proportion of SMA assets represented by fixed-income strategies increased from about 29% to 45%.

Disrupting the Robos: Platformization and the Digital Delivery of Advice

The first generation of robo advisors captured the imagination of the media with high tech, low fees and user-friendly service. In some respects, robos encapsulate several powerful trends in advice delivery: digital distribution, passive investing, goals-based planning, and fiduciary responsibility.

Robo advisors are essentially online advisory platforms that leverage sophisticated algorithms to provide portfolio management services to investors, with little to no human intervention. With each passing day, robo offerings become increasingly intelligent. In 2015, Schwab and Vanguard launched robos that quickly vaulted to the top of the robo advisor AUM rankings. Dover believes that full-service sponsor firms have an opportunity to leverage their sophisticated advisory platform-based delivery systems to build even better forms of digital advice delivery that are likely to disrupt the current generation of robos.

A key element in that potential disruption is the growing industry trend toward “platformization,” which is defined as having three principal components: goals-based financial planning, portfolio construction, and increasingly sophisticated operational platforms. In effect, it is the integration of multiple product-specific platforms to create a single unified platform that can deliver comprehensive investment solutions which can be customized to accommodate the way advisors and clients decide to work together.

By enabling advisors to leverage a single operational infrastructure regardless of product, pricing, or discretionary preferences, platformization continues the long-term shift from a product orientation toward a solutions orientation – one that allows for scalable customization, providing the advisor with greater flexibility and offering the sponsor firm an opportunity to enhance its profitability.

“We believe that platformization offers an excellent guide for strategic thinking about digital advice delivery,” said Jean Sullivan, Managing Principal of Dover Financial Research. “Sponsor firms do not have to be at the cutting edge of innovation to profit from the digital revolution, but they must actively monitor developments in this domain to sustain a competitive edge and a robust wealth management franchise.”

The report goes on to discuss how robos are seeking to achieve scale through mass market solutions, the drawbacks to standardization that robos are prone to adopt, the dynamics of the competition between pure robo firms and large sponsor firms providing more customized solutions with digital advice components, and probable future robo enhancements.