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Financial advisors & managed accounts: achieving a symbiosis

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In the Beginning …

When ProManage helped pioneer the Managed Account industry in 1998, two of the biggest issues for sponsors of defined contribution plans were: 

  1. How do you get people to participate and save?
  2. How do you get and keep them well invested over time?

We focused on the latter issue since basic plan design alternatives already existed that were extraordinarily effective at addressing participation and savings, even though they were seldom implemented. Given our consulting and plan sponsor backgrounds, we knew that education and communication efforts were only marginally successful in addressing the investment issue.

We were aware of the burgeoning online advice efforts to fix this issue. But we knew they were doomed to be just another set of underutilized investment education communication material, if they expected the people who needed help the most to actually go online and use an interactive tool. 

To address this challenge, ProManage focused on those we termed “Reluctant Investors.” These investors are people who do not have the time, desire or knowledge to do a good job of investing their DC assets.

Managed Accounts, the Reluctant Investor’s Best Friend

What is the best way to address the needs of the Reluctant Investor?   Answer:  managed accounts. In other words, just do the investment work for them.  It has proven to be an effective, efficient and durable solution in meeting their investing needs.

From our previous work, we expected 80 percent of the participants in a typical plan were Reluctant Investors. Yet, prior to Managed Accounts, efforts to communicate and educate Reluctant Investors did well if they reached 10 percent of the participants.

The obvious disconnect was the industry was asking Reluctant Investors to do something they did not want to do. The clear answer: automatically make the investment election for them.

The default mechanism uses inertia to Reluctant Investors’ benefit so that when they do nothing, good things happen. They retain choice, but it is one more attuned to the Reluctant Investor (i.e., to opt-out should they become motivated and wish to make their own investment decisions).

All Managed Account providers offer participants the opportunity to have someone make investment decisions for them based solely on data available from the plan sponsor and its service providers. Managed Accounts may not be the right fit for everyone, for example:

  • Those who have significant assets outside of the sponsor’s retirement program
  • People relying on a spouse’s retirement income for their own retirement needs
  • People who are saving for something other than retirement

Managed Accounts need not cover non-investment issues to help Reluctant Investors, for example:

  • When to retire,
  • How much one needs in retirement,
  • How much to save and
  • How to manage the payout phase of retirement.

Compete vs. Coordinate

Financial advisors trying to service the needs of Reluctant Investors face several major challenges. The first is gathering information. Reluctant Investors do not want to: meet with you, go online and input data, or think about investments.

The next challenge, cost, is a big issue. Managed Account services range from sub-10 basis points fees to about 60 basis points. Financial advisors can cover investment issues beyond just the investment of one’s 401(k) and expect compensation for broader more personalized advice and one-on-one time, which warrant higher fees.

Without connectivity to the record keeper, financial advisors need to have Reluctant Investors take action to implement the advice. Catch 22: Reluctant Investors typically will not do this!

Managed Account providers assume fiduciary responsibility. Many advisors are unwilling to be fiduciaries.

Managed Account providers accept any size account balance. Most financial advisors typically have a threshold account size below which it does not make economic sense for them to take on a client.

Ultimately, a financial advisor should ask:

  • Do I want everyone in a plan as clients?
  • Can I handle everyone in a plan?
  • Can I do a quality job for everyone?

If the answer to these questions is “no,” then a financial advisor should consider the advantages of coordination of their services with managed accounts. Perhaps the biggest advantage is bang for the buck:

  • Eighty-percent of the participants are Reluctant Investors, but they only account for 50 percent of the assets of a typical plan. Financial advisors can deal with individuals with larger account balances by targeting Motivated Investors.
  • Motivated Investors are also likely to have significant outside assets, tax issues that need special attention, or unique and difficult retirement and estate planning issues. In addition, financial advisors can focus attention on the balance among the four key retirement considerations:
  1. Retirement age
  2. Retirement income
  3. Savings rate
  4. Psychological investment risk tolerance

Finally, payout management is a critical area leveraging a financial advisor’s expertise.

By coordinating efforts, managed accounts can meet the investment needs of Reluctant Investors efficiently, effectively and dynamically over time, while Motivated Investors can get the level of attention they need and want from advisors. Furthermore, all can benefit by bringing advisors’ skills and expertise to bear on issues like how to manage the retirement decision and the payout process.

Managing Managed Accounts

Adding a Managed Account service to a plan can only be done if the provider is carefully chosen and monitored, as required by ERISA and by common sense. 

Plan sponsors need help with these responsibilities. The ERISA standard for choosing a managed account provider as a co-fiduciary is defined by what a prudent expert would do. Financial advisors can help a naïve plan sponsor make that selection.

Choosing should involve looking at whether or not there are alternative managed account providers available. What are their processes and procedures? Are they prudent in the eyes of the expert — the financial advisor? Are the fees reasonable?

Monitoring involves determining whether the managed account provider is doing what they said they would do and assessing whether anything has changed that would necessitate a change in their process.


There can and should be a symbiotic relationship between financial advisors and managed accounts for the good of the participants in the DC plan.

See also:

Unified managed accounts hit $289.8 billion in 2013

Cerulli: Flexibility is key in choice of managed account programs

Unified managed accounts double marketshare


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