Mass customization aimed at retail growth

Money managers and investment consultants that manage money, including those with outsourced CIO strategies, increasingly are looking to offer and expand their mass-customization strategies to further diversify their client base in retail channels.

Individual managers and consultants internally define mass customization in different ways, but at its most basic level, the label refers to the ability of a manager, consultant or a financial intermediary — such as a wealth manager, registered investment adviser or broker-dealer — to "deliver personalized investment strategies at scale," said Bryan J. Dori, president and CEO of Archer IMS LLC, Berwyn, Pa., a technology service provider to investment companies, in an email.

He said mass customization is growing due to rising retail investor demand and the opportunity it presents for institutional money managers and other providers of investment strategies, as well as technology advances that make mass-tailored portfolios possible.

"Today's investors are accustomed to a personalized experience in all aspects of their (lives) from the way they order their coffee to the way they consume television. They are less likely to invest in out-of-the-box investment products. They want to control ESG preferences and restrictions, optimize the after-tax returns of their portfolios and have transparency into what companies their dollars are being invested in," Mr. Dori said.

Money managers "offering existing strategies in new packaging creates an opportunity to reach new audiences while leveraging the manager's existing investment talent and expertise," he said.

Among the personalized strategies in demand by the existing and new retail clients of money managers and financial intermediaries are model portfolios; separately managed accounts; unified managed accounts, which combine separately managed accounts; thematic; outcome-oriented strategies; and customized target-date funds, sources said.

"Money managers absolutely are looking to offer mass customization. The topic has been coming up a lot in conversations with money managers over the past five or six years" and the pace of adoption is quickening, said Jeffrey A. Levi, a Stamford, Conn.-based principal at Casey Quirk, a practice of Deloitte Consulting LLP, which advises money managers.

"Mass customization is the future of financial advisory, and it's a big area of growth for wealth platforms that want to offer a suite of SMA and model portfolios," Mr. Levi said.

Model portfolios are multiasset portfolios created by money managers, consultants and financial intermediaries to meet investors' goals and/or their risk tolerances.

In addition to investor demand, another strong driver behind the growth of personalized investments is the industrywide move by financial intermediaries toward fee-based asset growth, which includes advisory services for investors, and away from commission-based retail investment management, Mr. Levi said.

He added that the changing landscape of the retail and wealth management industry is prompting more financial intermediaries to work with money managers and consultants that can provide model and separately managed account portfolios that are customizable to varying degrees — usually depending on client size — that reflect the investor's risk tolerance, income needs and personal values.

Money managers and consultants that manage money have taken notice of the potential of mass customization for their bottom line.

The vast majority — 80% — of the 250 senior executives of U.S. and Canadian money managers surveyed by Accenture PLC in November and December said they believed that "customization for the masses will be an important investment strategy over the next five years," according to the firm's "The Future of Asset Management" report published in May.

"Financial intermediaries are doubling down on developing the technology and data analytics they need for mass customization" and are hiring managers that can create model portfolios and SMAs, said Girard M. Healy, Boston-based managing director in Accenture's North American asset management group, in an interview.

For money managers, "mass customization does require significant scale and the right technology to provide digital and mobile technology" to meet retail investor expectations, Mr. Healy said.

Consultant Wilshire Advisors LLC, Santa Monica, Calif., initially offered its institutional capabilities in asset allocation, portfolio construction and fund selection to the investment adviser industry, but mainly in prepackaged solutions for advisers working with retirement plans and individual investors, said Nathan Palmer, managing director, in an email.

By "leveraging technology to provide the benefits of both customization and automation together — mass customization — (Wilshire has been able) to create flexible, high-quality investment solutions unique to the individual adviser, retirement plan or end investor irrespective of size," Mr. Palmer said.

He added that Wilshire has also harnessed its investment technology to power customized advice for retirement plan participants; target-date portfolios that plan sponsors can customize by setting the glide path, vehicle, asset class, active/passive mix and fund selection; and model portfolios for wealth management firms that select the investment options while Wilshire handles asset allocation and manager structure.

"We remain extremely excited about the prospects for the success of mass-customized discretionary portfolios within the wealth management channel," Mr. Palmer said.

He said Wilshire estimates that the use of model portfolios in the wealth management segment exceeds $1 trillion, about four times the adoption by retirement plans, but still represents less than 10% of wealth management assets.

"We believe that the development of new investment technologies … will enable advisers to automate and streamline the creation of customized models," Mr. Palmer said.

Wilshire had assets under advisement of $1.4 trillion and $87 billion under management as of March 31, of which $20.4 billion was managed for institutional investors worldwide with full or partial discretion in OCIO strategies, according to data the firm provided for Pensions & Investments' annual OCIO report. Wilshire did not provide assets managed for retail and wealth management investors.

For the most part, OCIO strategies are the common thread of customization among money managers and consultants.

Ryan Marshall, managing director and co-head of multiasset strategies and solutions at BlackRock Inc., New York, for example, stressed that the firm's institutional OCIO business is highly customized and is "the bridge between institutional whole-portfolio construction and ... mass customization." BlackRock is partnering with financial intermediaries to provide thousands of customizable model portfolios built with robust risk management, something the firm could not do without the technical support of the firm's Aladdin risk management system and its wealth advisory platform, Mr. Marshall said.

He said the services that BlackRock's solutions unit provides separate into traditional OCIO management for institutional investors and model-based portfolios that wealth managers — as fiduciaries — implement on behalf of their clients. Advisers can select models using just BlackRock's iShares ETF funds, a blend of iShares and the firm's actively managed funds or open-architecture funds of external managers.

BlackRock is intently courting the wealth management segment and Mr. Marshall said he expects the firm's mass customization business to double the pace of its growth in this area over the next three years.

BlackRock doesn't break out the amount of assets wealth managers invest in the firm's funds on behalf of their clients. As of March 31, BlackRock managed a total of $9 trillion, while the solutions business had a total of $440 billion under management. Of that total, $158.7 billion was managed in worldwide institutional OCIO strategies managed with full or partial discretion, according to P&I data.

New York-based consultant Mercer has been building customized model portfolios for financial intermediaries around the world for more than 20 years based on risk tolerance, but the firm is keeping an eye on retail investor opportunities, said Rich Nuzum, president of the company's investments and retirement business, in an interview.

"OCIO managers may not use the term mass customization, but many are involved in serving the market. About half of our OCIO mandates are managed in customized accounts," Mr. Nuzum said.

On a smaller scale, Mr. Nuzum said Mercer recently has assisted financial intermediaries with creating investment program applications and in creating model portfolios in the huge retail markets in China and India.

"I think retail investment will become more important because of the growing need for savings. No countries I know of are raising tax-deductible limits on savings, especially for retirement," Mr. Nuzum said.

Mercer managed $367 billion in worldwide institutional OCIO strategies managed with full or partial discretion as of March 31, making it the largest OCIO manager in P&I's annual survey of OCIO providers.