Bill Hortz's picture

[When it comes to growth opportunities for institutional asset managers, many industry researchers have reported that distribution executives think the biggest opportunity moving forward is in the RIA channel. Asset managers will likely dedicate more resources to RIAs over the next three years in line with their consistent growth of market share. According to Cerulli Associates’ projections, as the wirehouse channel continues to cede market share, independent and hybrid RIAs will collectively account for 30.6% of advisor-managed assets by 2025.

This distribution channel is deemed as still an open ocean, but it comes with its challenges – lacking uniformity, each firm is unique requiring a firm-by-firm strategic partnership with the ability to create and maintain customized models and, oftentimes, it is not a plug-and-play deployment.

In pursuit of this channel, asset managers have embraced model delivery to separate account platforms and TAMPs, but a large percentage of Assets Under Management (AUM) remain manager-traded. With the latter, the manager needs to have the infrastructure to contract directly with RIA clients individually and do the trading, reconciliation, and reporting. It is a challenge because many are not wired to handle a large volume of retail sized accounts across RIAs. Most institutional asset managers are just not operationally set up to directly engage with individual RIAs.

To learn more about these asset manager challenges, opportunities, and how financial technology is playing a major role in this evolution, we reached out to Institute member Robert Battista SVP, Vestmark Advisory Solutions. Their capabilities with their Vestmark Manager Marketplace and a highly experienced trading team offer the ability to basically replicate the model delivery experience for asset managers who are expanding their engagement in the RIA space.]

Hortz: Can you give us a current lay of the land of the opportunities and challenges for asset managers in the SMA space?

Battista: Most large asset managers established themselves by serving institutional investors and continued to grow their business by entering the retail market, primarily through distributing products through large- to medium-sized broker dealers. Shelf space at large retail-focused wealth management firms is highly sought after because it provides distribution to many advisors and clients through a single set of pipes. However, a combination of factors such as industry consolidation, overly saturated product platforms, and increasing shelf space fees are driving asset managers to find new sources of retail AUM growth. The RIA market is enormous in aggregate, so it is extremely attractive, but it is highly fragmented and presents a number of challenges.

Most asset managers prefer to serve the retail channel through model delivery, which enables the manager to deliver a model to a centralized source such as a TAMP. Many RIAs access SMAs through TAMPs, but these platforms often lack the flexibility and customization RIAs demand, and they often carry heavy fees. In some instances, the additional layer of fees may cause RIAs to reconsider outsourced investments because the all-in cost to their clients is just too high. A large portion of SMA assets remain manager-traded, but most asset managers do not have the capability or desire to manage a high volume of retail-sized accounts.

Hortz: Can you share with us a better understanding of the operational issues at play?

Battista: Many RIAs seek direct relationships with asset managers. Advisors that have chosen to run their business in the independent channel often seek to offer tailored solutions to their clients. For asset managers to compete for this business they will need to invest in sophisticated technology that enables them to manage customized relationships at scale.

In addition, managers need to establish custodial integrations with their chosen technology so they can manage portfolios with accurate account level information, conduct daily reconciliation, and offer flexible reporting. The daily management of these tasks can take up meaningful resources and most asset managers would prefer to focus their efforts on true value creating activities such as managing portfolios and relationships.

Hortz: How are you redesigning your different capabilities to address asset managers’ pain points in this market?

Battista: Vestmark has a strong reputation for providing sophisticated portfolio management software that enables some of the industry’s largest wealth management firms to scale their managed account platforms. Our platform currently supports over $1.5 trillion in assets and we work with 6 of the 10 largest managed account sponsors.

Vestmark Advisory Solutions has historically focused on providing access to manager models through the Vestmark Manager Marketplace and by offering discretionary trading and various back-office services. More recently, we have repackaged our capabilities and began offering a similar set of services directly to asset managers. As managers seek to grow in the RIA market, they can now leverage our technology, experience, and existing custodial integrations to alleviate many of the operational burdens of doing business across the more disconnected individual RIA marketplace. We have created a framework that replicates the simplicity of model delivery so managers can run faster and not worry about the operational burdens when new opportunities require SMAs to be manager-traded.

Hortz: From your current and previous experience working nearly 20 years with advisors and asset managers, how do you see that asset managers can best succeed with RIAs and retail SMAs?

Battista: Asset managers need to be visible and have a simple and consistent narrative. Why have you been successful at generating value for clients and why is it likely to persist in the future? One thing I have learned over the years is that regardless of the channel, financial advisors do business with managers that establish a long-term relationship. They want asset management services, but more importantly, they want a business partner who understands their practice and can offer value in ways beyond investment returns. This is particularly challenging in the RIA space because of its decentralized nature.

In a resource-constrained world (which most of us live in), this only further emphasizes the need to allocate resources to distribution over operations and administration. It is just good business sense to focus on the activities that have the most visible impact on your business and to outsource non-differentiating middle and back-office services. As business owners themselves, RIAs understand this mentality, and most would not view outsourcing of these services as a negative factor in manager selection. It may be viewed as a strength if you can highlight the focused expertise that will be applied to their clients’ accounts.

Hortz: How exactly do you work with asset managers on these issues?

Battista: There are many ways we can repackage our capabilities to support asset managers, but the most simplistic example is to replicate the experience of model delivery with RIAs who require SMAs to be manager-traded. In this example, the manager would become a model provider on our Manager Marketplace, which currently houses roughly 1,000 models from 300+ managers. The RIA would source models through the Marketplace and Vestmark Advisory Solutions would manage accounts in line with the assigned model on our own instance of the VestmarkOne platform. The manager is responsible for keeping the model accurate and updated and Vestmark Advisory Solutions handles all the trading, reconciliation, and quarterly/annual client reporting.

Currently, there are no costs associated with being a manager on our Manager Marketplace. The RIA would be charged a fee based on AUM for access to models, trading, and other outsourced services, but these fees are significantly lower than the cost of your typical TAMP and RIAs will generally bundle this fee with the asset manager’s fee.

Hortz: Any advice or recommendations for asset managers who are looking to expand their SMA capabilities to the RIA market?

Battista: Customization is king. Any industry publication you read these days has “offering more customized portfolios” as a top priority of wealth management firms. In today’s world, clients are demanding hyper-personalized advice and solutions. Wealth management firms who fail to adapt to this trend will likely see their market share decline.

The evolution of model portfolios has brought down costs, increased the universe of available strategies, and driven significant growth in AUM. However, the industry is now grappling with the most obvious negative of model portfolios……they are rigid and can often feel “off the shelf.”

RIAs have chosen to be independent because they like to do things a certain way and not be forced to manage their practice as defined by a large firm’s home office or back office. Similarly, they often have a very specific way they seek to manage their client's assets and they tend to hold themselves to the highest fiduciary standards.

Asset managers should seek to identify RIAs that are looking for a partnership to manage a large portion of their client's assets and build them a custom set of model portfolios. Additionally, offering ongoing tax management and values-based customizations are becoming table stakes. Most of the prominent technology providers in this space have either been acquired or are simply holding their capabilities captive to their own asset management strategies. Firms that are not interested in or capable of building these capabilities in-house may want to consider working with a partner like Vestmark, that can help power white-labeled customization at scale.


The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation, and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors – Ultimus Fund Solutions, NASDAQ, FLX Networks, Advisorpedia, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).


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