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The Future of Managed Accounts

Kevin Connor
Mar 21, 2017

If you have been in the financial planning or wealth management business for some time, you have seen enormous changes in the industry. You have seen high-cost full-service brokerage firms largely go away, replaced by do-it-yourself trading and discount brokers that let stock buyers purchase shares for less than $10. You have seen managed mutual funds emerge and then begin to decline as lower cost passive investments like exchange traded funds (ETFs) and index funds offered investors a better value.

You have even seen the rise of robo-investing, an automated form of investment management that promises better returns, lower costs and a reduced level of risk. In this kind of environment, it's only natural to wonder about the future of managed accounts, and where your practice will fit into this brave new world.

While there is certainly reason to be concerned, it is also clear that managed accounts are not going away. As long as there are clients and assets under management, there will always be a need for managed accounts. The future of managed accounts may look different than the past, but those changes present some real opportunities for practice owners who are prepared and ready to meet the evolving needs of their clients.

One of the ways in which the managed account concept is changing is the need for constant account access and transparency. While past generations of investors were content to wait for their monthly statements to arrive in the mail, the new generation of investor demands timely information whenever they want it.

That's why smart financial planning and wealth management practices have incorporated the latest FinTech into their operations. Financial technology products like WealthBox give practice owners the ability to communicate with their customers in a seamless manner, improving client service and building on past successes. Products like eMoneyAdvisor go one step further, giving those proactive clients the ability to manage their portfolios in real time and see where they stand anytime day or night. By using these technological tools, the owners of financial planning and wealth management practices are able to ramp up their offerings, meeting and exceeding the extensive needs of the modern financial advisory client.

Another big advantage of managed accounts, one that clients certainly appreciate, is that of customization. While many investors are perfectly content to buy into a large index fund like the S&P 500 and hold it forever, others are looking for more specialization in their investments. Managed funds offer the perfect complement to passive investing, giving largely index-based investors a chance to experiment with various approaches to investing and stock picking.

Savvy financial planners and wealth managers can also use the managed account model to lower taxes for their clients and create a highly tax-efficient investment environment. While tax efficiency has always been the hallmark of the passive investment model, there is no reason a managed account can't be just as low cost and tax efficient. All it takes is a smart financial advisor to put it into practice.

Managed accounts also allow practice owners to fill a niche that until now has been largely underserved. Many smaller clients, those with $50,000 to $100,000 to invest, have often felt left out by the financial planning industry, and, as a result, they have turned to index mutual funds, discount brokers, and other DIY investment products. By reaching out to those smaller clients, the owners of financial planning and wealth management practices can fill this gap and regain these valuable clients.

While some practice owners think small accounts may not be worth their time, their smarter competitors know better. They know that taking on a small account today can mean a significant increase in AUM later. They know that, if they do their job right and make smart investment choices for that small client, the account will not stay small for long. As those individual accounts grow, so does the firm's AUM.

More importantly, the loyalty that great client service engenders is infectious. It can result in a large number of new client referrals down the road. By paying attention to smaller clients and using managed funds to serve them, practice owners can build their businesses, grow their AUM and boost their profit margins. Far from being irrelevant, managed accounts are more important now than ever.

It's clear that managed funds are still going strong, and that they still have their niche in the financial planning and wealth management industry. While the move toward passive investments like exchange-traded funds and index funds is still underway, there will always be clients who appreciate the transparency and specialized customer service inherent in the managed funds model.

Some clients will use managed funds to supplement the passive investments they have already built, using a small portion of their net worth to seek higher returns. By understanding their needs and investment style, a practice owner can provide ongoing support and guidance, using the superior performance of their managed funds to attract more assets over time.

Other investors will prefer a fully managed approach to their accounts. Once again, listening to the needs of clients can be valuable, helping those clients get what they are looking for and growing their accounts over time. Managed accounts are excellent vehicles for this purpose since they allow the broker or advisor to tailor the holdings to the needs of the client. Whether the strategy is one of long-term growth, superior short-term results, tax minimization or estate maximization, the managed fund can be customized and tailored to achieve these goals.

There have been enormous changes in the financial industry over the past couple of decades, but the future of managed funds remains bright. Whether they are used as part of a larger DIY and passive strategy or entirely on their own, managed funds are clearly here to stay.

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