Direct Firms Can Grow Through Managed Accounts: Cerulli

Steady increase can come through providing advice to existing clients

Discount or direct firms are in a good position to gain market share, and by adding managed accounts stand to grow at a steady pace, according to data from Cerulli, which indicates that growth in the direct channel has risen from 2.4% of industry assets in 2001 to 7.1% last year.

In its managed accounts edition of The Cerulli Edge, the company finds that even as wirehouse market share declines, that of the direct channel is growing steadily, if not at a breakneck pace. The reason? Direct providers are able to keep their existing self-directed clients interested by providing managed accounts and advice.

Katharine Wolf, associate director at Cerulli Associates, said in a statement, “Direct providers realized the need to develop greater guidance and advice services to capture a larger slice of their clients’ long-term portfolios. As such, these providers began developing managed account programs that offer their clients ongoing investment management for an asset-based fee and are engineered to appeal to advice-seeking clients.”

While previously self-directed clients may have sought advice elsewhere, the move toward providing advice by a number of direct firms has kept those clients from defecting elsewhere, and the firms that have taken the lead in developing advice and managed accounts are showing the results, with Fidelity and Schwab, the largest, not only having substantial managed account programs but also respectable assets in those programs–$102 billion at the former and $59 billion at the latter.

Firms like E*Trade, TD Ameritrade, and TIAA-CREF may just be in the early stages of advice delivery, and have less than $5 billion apiece in such accounts to show for it, but there is plenty of room for growth.

According to Wolf, direct providers chiefly face two challenges in this shift toward advice. The first is staff, since they need to either hire or retrain representatives to handle clients. The second is the need to reposition themselves as go-to sources for advice when they are chiefly known for their wooing of traders who prefer to handle their own assets. These tend to limit the rate at which they add managed accounts, which at present range from less than 1% to around 13% of clients.

However, direct firms have the advantage of a wide client pool for prospecting, since 67% of investing households already have direct accounts. So it doesn’t take much of an increase to provide steady growth in managed account programs.

Wolf said, “In my view, direct firms have a number of tailwinds for their managed account programs. Not the least of which is that their model allows them to profitably offer advice to clients at lower cost than many other advice providers.”

According to her estimates, by the end of 2014 the direct channel will have seen growth to $4.9 trillion, with managed accounts making up a steadily growing proportion of assets at such firms. She sees asset growth from 4% to 8% in that time period.

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