This is a summary of a panel discussion from the Money Management Institute’s 2012 Spring conference held in Chicago, IL. This is part 1 of 2. You can read part 2 of 2 here.
Moderator: Jay Link, Managing Director, Merrill Lynch
, Managing Director, Head of Managed Solutions Group, Merrill Lynch
Head of Consulting Group, Morgan Stanley Smith Barney
Has the growth of RPM programs peaked? According to Dover Research, five years ago, there was $1.2 trillion of client assets in managed solutions and RPM/RAA combined were less than 30% of that total. Today, total managed assets have grown to $2.4 trillion while rep-driven programs have increased their share to 40% or almost $1 trillion.
How important is RPM to your firm?
RPM is Morgan Stanley’s fastest growing program, Walker reported, with $560 bil in all advisory programs, $150 bil in RPM globally. Major change in past few year has been change from individual equities (now 34%) to include ETFs, mutual funds, etc. This is a great solution for Reps that consider themselves to be active allocators. Trend: move towards discretion, driven by FAs practice management, customers want outcome based investing. From a regulatory sense, it’s easier to deliver on fiduciary duty.
Sabbia joined the Managed Solutions Group seven months ago. At Merrill, RPM is called the Personal Investment Advisory (PIA) program and was launched in 1996, now $105 bil AUM. Approximately 4,500 FAs leverage the program and they’re segmented into three buckets: it’s their fastest growing segment with a $15.7 bil net increase last year and they’re on track to beat that number this year, she said.
What kind of changes have you seen in RPM in the past few years?
Underlying the trend towards RPM is an increase in the need for discretion by FA’s, Walker commented. Due to increases in market volatility, the world has become more tactical and clients are demanding more frequent shifts in their portfolios, which requires more trading. This makes having to obtain permission for every trade impractical, he noted.
Sabbia pointed out that the Rep as PM model is well-suited to help a improve the scalability of practices that previously focused on investing in individual securities. In Merrill’s PIA program, they encourage the use of pooled vehicles (i.e. ETFs and mutual funds), which are easier to manage than baskets of individual equities.
They also have guidelines at Merrill that restrict what an advisor can do, in order to match the level of flexibility to the amount of experience, Sabia continued. Clients have become more conservative in their approach to risk since the crash. From a practice management perspective, an advisor’s value proposition is through the delivery of advice, so Merrill allows advisors to gain more flexibility as they move up the ladder. There is a lot of growth in PIA because advisors want to be more involved in their client’s asset allocation, she commented.
Walker added that many advisors try to create a unique strategy that they can tout as their own “special sauce”. But they also like to run ETFs in an asset allocation program concurrently.
How is RPM different from from other channels?
A big difference between RPM and other channels is in the velocity of assets, Witkos reported. Advisors using RPM have higher portfolio turnover so they tend to trade more. When comparing distribution channels, instead of just looking at sales, Witkos says that he looks at holding periods by channel. A lot of asset management companies are concerned about channel turnover rates, he said.
Jay Link discussed the higher turnover rate at the MMI Fall 2011 Conference, which I wrote about in my blog posting, Rep as PM: The Inside Scoop:
Some of the added velocity Jay attributed to the ease of use of the RPM tools, which enable an advisor to act quicker than in a non-discretionary account. There are also more mutual funds available that align with the desire of advisors for tactical exposure. Merrill advisors are using them for this purpose, he said, and this goes along with changes in investor demand and the forces of competitive differentiation.
One way to compare velocity across programs is through redemption rates. According to data obtained by Strategic Insight on Rep-as-PM vs. Rep-as-Advisor programs, equity fund asset velocity is significantly higher and more volatile within Rep as PM platforms, as shown in the charts below.
Source: Strategic Insight
Source: Strategic Insight
What is the value proposition of RPM for clients?
The biggest value to clients comes from the discretion in RPM, Walker proposed. Many clients prefer outcome-based investing and having the advisors take discretion provides a more consistent outcome since they don’t have to check with the client on every trade. Clients also fell less inclined to provide input on investment decisions, which makes the advisor’s job easier, he said.
Sabbia agreed with this and commented that today’s markets move too fast for most clients. When a client calls her with an investment idea, by the time she returns the phone call, it’s no longer a good idea! The two biggest requests from clients are for more transparency in their accounts and simplicity in products they are sold. RPM succeeds in both areas and clients are voting with their money by continuing to open new RPM accounts, she stated.
Are there any differences in economics that are helping to drive the growth of RPM
FAs are rational economic actors and they tend to move towards products that work best for them, Walker said. At Morgan Stanley, a transactional account has fees that are in the high 30 bps range, while RPM accounts are closer to 100 bps. There is a positive lift in assets since the clients get more value out of the program. Walker emphasized that they focus on creating transparency for clients around the total cost of ownership of an account.
We’re no longer in a buy and hold world. Larger and more sophisticated RIAs are moving away from style boxes and accepting more tracking error as well as demanding more flexibility. What are the real issues about mutual fund velocity?
In any commingled vehicle, when you a portion of the shareholders have a longer term outlook, such as those in retirement plans, then these investors will bear the brunt of the higher transaction costs that go along with increased velocity, Witkos observed.
As RPM grows, sales force compensation will have to change, he continued. Otherwise, due to market volatility, you may wind up paying your wholesaler three or four times on the same money. On the asset management side, the whole compensation model will evolve and it won’t just rely on the point of sale, thee will be other factors involved, Witkos stated.
This was part 1 of 2. You can read part 2 here