Given its size and growth, the registered investment advisor channel is a critical market for asset management firms who want to grow, according to a report released Monday by Boston Consulting Group. But the fragmentation of the RIA market also poses a challenge for asset managers, said Gary Shub, partner of BCG’s financial institutions practice and a co-author of the report titled “Building on Success: Global Asset Management 2011.”
The RIA channel is one of the key channels for distribution of asset management products, with about $1.5 trillion, or 15 percent, of U.S. retail assets distributed through RIAs, and this is growing, Shub said. But the segment is hard to reach because of its fragmentation, and many firms shy away because of the extra costs associated with marketing and chasing down individual firms, Shub added.
BCG’s study, which covered firms in 35 major markets, found that while the asset management industry continued to rebound in 2010, these firms still face significant hurdles for growth, including an increasingly competitive landscape. The good news: Global AUM was up 8 percent in 2010 to $56.4 trillion, which BCG attributed primarily to the recovery in the equity markets. North American AUM also gained 8 percent last year, with the U.S. asset growth at 8.5 percent. However, net new inflows were only marginally positive at less than 0.5 percent above year-end 2009 AUM. The Americas region actually had outflows of 0.4 percent, the report said.
The Fight for Shelf Space
Even as net inflows slow, investors have become more demanding, and retail distribution is becoming more institutionalized, said Brent Beardsley, a partner at BCG, during a media briefing Monday morning in New York. Asset managers face more rigorous due diligence, and the growing popularity of wrap programs has narrowed the number of funds available on brokerage platforms, he added.
According to Shub, about 20 percent of U.S. retail assets are sold through packaged products, such as separately managed accounts, mutual fund wrap programs and unified managed accounts. There has been a growing interest in these packaged products, especially at the wirehouses, so it’s key that asset managers actively reach out to the “professional buyers” at these firms, Shub said.
“Because advisor behavior is increasingly influenced by central decision-making, the goal is to gain access to managed programs or model portfolios,” the report said.
Monish Kumar, senior partner and global leader of asset and wealth management at BCG, said that because many full-service brokerages are consolidating fast, there’s an even greater fight for shelf space as brokerages eliminate redundancies on their investment platforms. These days, an asset manager has to go beyond showing he has good products in order to get shelf space.
And that means competition is heating up. In fact, the bulk of 2010 net flows in the U.S. were concentrated among the top 10 asset managers, the report said. For the larger advisor networks, there’s an opportunity to take advantage of this increased competition between asset managers, Shub said. But smaller firms, such as IBDs and RIAs, should recognize the difficulty asset managers have in reaching them, as management firms typically take a more opportunistic approach to that market. Asset managers tend to focus their efforts on the larger, higher-volume purchasers, such as the wirehouses. But advisors at the smaller firms have to be more proactive about which products they want access to, he added. More than ever, clients want products that are customized or at least perceived to be tailored to their needs.
“[Investors] do want to make sure they’re getting access to the best products through their financial advisor,” Shub said.
What Investors Want
With investors still somewhat reluctant to put their money back in the market, they’re looking for investment products that minimize risk, the report said. During the crisis, investors were disappointed with the performance they were getting from actively managed products, and increasingly, they’re not willing to pay the higher fees for active management, Shub said. While active products still account for about 80 percent of global AUM, passive products are growing at a faster pace than actively managed products.
Passive equity and passive fixed income products are expected to grow between about 5 to 10 percent by 2014, while ETFs are projected to grow nearly 20 percent, according to BCG. In the U.S., AUM for ETFs grew by 26 percent in 2010 to $891 billion, the report said.
“It is also interesting to note that, in terms of AUM, ETFs have become more prominent for private investors as building blocks for investment solutions provided directly by wealth managers,” the report said.
In general, the report said there’s a greater willingness to return to managed investment products and get out of low-risk products, such as money market funds and CDs, Shub said. However, the asset class mix hasn’t moved back to the way it was before the crisis, with a slow movement into equities. Fixed income mutual funds and ETFs posted net sales of $241 billion in the U.S. in 2010, while equity funds had negative sales of $37 billion, the report found.