Separate lives: why product and advice can't be together

A new report from the Boston-based Cerulli Associates predicts that the separation of product from advice will continue to gather pace.

In its Q1 2006 Managed Accounts report Cerulli points to the asset swap between Citigroup and Legg Mason as the most recent evidence of the trend for product manufacturers to unbundle their distribution capabilities. And while the trend might partly be explained by regulators becoming increasingly suspicious of the potential conflicts of interest between product manufacturers and any advice networks they may own (ASIC is a prime example of this), Cerulli suggests there may be a more basic explanation. Manufacturing and distribution, the Cerulli report says, just aren’t right for each other anymore. “To start, revenue synergies from owning both manufacturing and distribution remain elusive. Advice is unbundling from manufacturing due to investors’ demands for objective advice and planning services from distributors,” Cerulli says. “The delivery of objective advice is perceived to be tainted – even by the investing public – when it comes from a firm with both manufacturing and distribution. Add to this the rising influence of professional buyers, and the environment not only bodes well for open architecture, but also for managed account platforms.” The report says that many financial advisers are avoiding charges of bias by refusing to sell products of affiliated manufacturers. Indeed, Cerulli says, most product manufacturers find it more difficult to sell to an affiliated chain of advisers than to the open market – an experience familiar to many Australian fund managers. Not only that, however, but manufacturers may even be hampering their sales efforts in the wider market if they own advice distribution networks. “Similarly, proprietary managers have not been overly successful in raising assets from unaffiliated retail distributors. Here again, the link with an affiliated advisor salesforce is a deterrent to raising assets. “Distributors often frown upon using products from manufacturers that are affiliated with an advisorforce that competes with their own, fearing ‘fraternizing with the enemy’. In an attempt to soothe this fear, proprietary managers many times create a separate identity or brand.” Later in the report Cerulli notes that “forcing synergies does not work”. “Some things just aren’t meant to be together, and attempts at coercion may actually lead to greater divisions. The industry is discovering that manufacturing and distribution are better separate than together—the elusive solution to successful financial services cross- selling has yet to be found.” Again, while the split between manufacturing and distribution may be more pronounced in the US than here, local product manufacturers will no doubt recognise some truth in the Cerulli claims. A good example of this effect playing out in the local game is MLC’s big push recently to distance its advice groups from the product arm with the launch of its so-called commission-free platform and last week’s announcement that its Godfrey Pembroke dealer group would move to a total ‘fee-for-advice’ model. Cerulli notes that the “jury is still out” on whether these strategies can completely remove the taint of manufacture from the advice mix. The changing battleground between distribution and manufacturing is also reflected in the way platforms operate and Cerulli has consequently altered the way it measures and categorises what it refers to as the ‘managed account’ market. Until its latest report Cerulli has defined managed accounts – wraps and master funds in Australian terms – based on the underlying investment vehicles and divided them into four categories: separately managed accounts (IMAs or SMAs); mutual fund advisory (similar to fund-of-funds); rep as portfolio manager (discretionary platforms), and; fee-based brokerage (fund ‘supermarkets’). Under its new system, however, Cerulli will categorise its platforms based on whether they are “discretionary” or “advisory”. “But program design change – being driven by the advent of vehicle-neutral unified managed accounts (UMA) platforms – will lead to three distinct arrangements, all guided by the principles of advisory and discretionary,” Cerulli says. “There will be UMAs that are arranged as discretionary advisory, nondiscretionary advisory, and nondiscretionary nonadvisory. Today’s $US1.4 trillion in managed account assets can be divided among these three categories… The discretionary advisory bucket is the largest, with 40 per cent of assets.” As well as these overarching categories Cerulli will measure platforms based on the ‘packaging’ or level of adviser or asset-manager input. The move to a UMA approach – essentially a platform that can seamlessly transact and report on all asset types – is driving many of the changes in the US market. “…, if firms are not currently offering some type of UMA, they are either rolling out some functionality in the next year or planning to do so in the future. This is significant because much of the future growth potential of managed accounts lies in vehicle-neutral advice delivery platforms (e.g., UMAs) that are driven by individual client needs,” the report says. But rather than get hung up on the finer points of product design Cerulli says industry participants should focus on delivering quality advice. “The product is advice, and managed accounts are a systematized way to deliver advice. While program design elements are important, advice delivery is the key ingredient for the healthy growth of managed accounts to continue.”