Managed account platforms getting the attention of RIAs

Retirement plan advisers are adopting the latest variety of managed-account platforms as their new best friend.

Because the new platforms allow them to build their own participant portfolios — rather than sticking to those devised through computer algorithms — registered investment adviser firms are taking a shine to them.

CAPTRUST Financial Advisors, a $390 billion RIA firm with mostly retirement plan business, for instance, began rolling out Morningstar Inc.'s newly released adviser managed accounts platform in February. The firm has a dozen plan sponsors either already adopting or planning to adopt the platform and also has a strong pipeline of prospects, said Jennifer Doss, CAPTRUST's Raleigh, N.C.-based director and defined contribution practice leader.

"I'm so excited to see so many of our advisers using the program," Ms. Doss said. "We've been very pleased to see the broad-based interest and we've got broad-based interest from clients as well."

The platform so far is only available to plan sponsors that use Charles Schwab Corp. as their record keeper but plans are in place to roll out the platform to other record keepers including T. Rowe Price Group Inc., Principal Financial Group and Milliman Inc.

Steve Wilt, principal and financial adviser at CAPTRUST in Akron, Ohio, has eight plan sponsors ranging in asset size from $20 million to $100 million on the platform and says it provides participants with a "much more customizable solution" than if they were "just doing it online on their own" using a traditional managed account.

"The whole process is built around the participant having access to a real, live adviser to help them make good decisions around their retirement outcomes," Mr. Wilt said.

The number of participants using the new platform was not readily available given the number of plan sponsors currently in the process of adding the program, Ms. Doss said.

Morningstar is marketing its adviser-focused platform through large RIA firms with significant retirement plan business. In addition to CAPTRUST, Morningstar has signed on nine other firms, most of which are giants in the world of retirement-focused RIAs, including Sageview Advisory Group LLC, Resources Investment Advisors LLC, Pensionmark Financial Group LLC, NFP Corp., and Hub International Ltd.

"Most of them have a pretty large book of business that they could potentially sell adviser managed accounts to," said Jim Smith, senior vice president and global head of sales and strategy at Morningstar Investment Management in Chicago.

While assets on the platform so far are modest, standing at just $3.4 million, Morningstar sees assets growing rapidly as RIA firms go live and begin to onboard sponsors in earnest.

The fact that the adoption by plans has been a little slower than the number of RIA firms signing on is "less to do with the platform" and "more to do with the COVID situation," Mr. Smith said, adding that plan sponsors that were planning to adopt the service this summer are pushing it out to the fall.

The new adviser-focused managed accounts are widely seen as a way for RIA firms to gain a competitive edge in a market besieged by escalating client demands. The intense pressure is driving RIA firms to boost their participant advice services, an area of growing interest to plan sponsors and one in which adviser-managed accounts can play an important role.

"As the economics around providing retirement plan consulting services is eroding due to many factors including commoditization and increasing competition from scaled competitors, focus on assisting the plan participant is becoming more important," said Dick Darian, the Charleston, S.C.-based CEO of retirement M&A consulting firm Wise Rhino Group, explaining that in-plan advice can help differentiate RIAs.

Indeed, many platform providers have stepped up to meet demand for adviser-focused managed accounts. In addition to Morningstar, digital advice providers such as Next Capital and Guided Choice offer adviser managed account platforms as do record keepers, such as Empower Retirement. Empower launched its adviser managed accounts program in March 2019 and as of June 30 had amassed $750 million in assets from about 15,000 participants in 213 retirement plans.

Neither Next Capital nor Guided Choice responded to emails requesting information about the number of plans and total assets on their platforms.

While gaining in popularity, the new adviser-focused platforms account for a small fraction of overall managed accounts, which hit $348.3 billion in assets in 2019, according to Department of Labor data, company reports and research from Cerulli Associates.

The new platforms are still just a "rounding error," so small a share of the overall market that Cerulli hasn't yet sized it, said Anastasia Krymkowski, an associate director in Cerulli's retirement group in Boston.

Still, observers see the platforms poised for growth. "As long as they're better for the investor, and it's something that the adviser can promote and sell and deliver as something that they do as a value add, I think it'll be popular," said Jason Grantz, the Highland Park, N.J.-based director of institutional retirement consulting for Unified Trust Co., a provider of discretionary trustee, record keeping and other services to small and midsize plans.

While fees for the new managed accounts have not been benchmarked against traditional ones, Ms. Krymkowski surmises — and has heard anecdotally — that the fees are comparable. "I wouldn't expect them to be that much more expensive," she said, noting the average traditional managed account fee is about 40 basis points.

Morningstar's adviser managed account platform costs anywhere from 25 to 50 basis points all-in, covering Morningstar, record keeper and RIA fees, Mr. Smith said. If the managed account is used as the QDIA "it's on the lower end of that range," and "somewhere in the middle to higher range" if it's used as an opt-in.

The new platforms differ from traditional managed accounts in that they give advisers the ability to build participant portfolios distinct from what a traditional managed account might spit out via an algorithm.

The level of flexibility varies by platform with some holding advisers to a preset investment methodology that must be followed and others giving them the freedom to use whatever methodology they choose.

The adviser's involvement can range from "honing" the methodology of the managed account provider to taking a "totally independent approach," Ms. Krymkowski said.

Morningstar's new platform, for example, provides advisers with a methodology or overall framework and is not what she would consider an "a la carte, do-whatever-you-want type platform," she said.

Morningstar's platform allows RIA firms to use their own research to build participant portfolios but they must adhere to Morningstar's methodology, which determines, for example, an appropriate equity allocation based on a participant's age or savings rate.

If Morningstar's methodology were to assign a participant an equity allocation of, say 70%, the RIA firm would have to follow that allocation, but it would be up to the RIA firm to decide how that 70% equity allocation is assembled, Morningstar's Mr. Smith said.

"RIA firms like that because they have their own research and their own investment methodology to determine what's an appropriate weighting to the various sub-asset classes, down even to the fund level," he said. "They can control that, and we're fine with that."

RIA firms using Morningstar's platform are also able to add investments that are not in a plan sponsor's investment menu provided they get permission from the plan sponsor to add them to the managed account. They might, for example, work with the plan sponsor to add a direct real estate fund to the adviser managed account to help diversify a participant's portfolio.

A plan sponsor might not be comfortable putting the fund in the lineup as a stand-alone, fearing someone might put all their money into it, but there might be a role for it within the managed account, Mr. Smith said.

For CAPTRUST, the decision to make the platform available to advisers was straightforward. The RIA firm saw the platform as a complement to its participant advice services, CAPTRUST's Ms. Doss said.

"We have very deep roots offering participant advice to our plan sponsors," she said, adding that 800 of the firm's plan sponsor clients already offer the advice services as part of their retirement plans.

"If you think about how many of our plan sponsors we already provide participant advice for, this is just a natural extension of that," she said, referring to adviser managed accounts.

"Right now we can have one-on-one meetings with participants, we can do phone calls with participants, we can do screen sharing with participants, we can go on-site and do things, but we didn't have a fully digital way of interacting with participants," she said. "This gives us that avenue to pursue and expand that advice that we can offer participants."