Authors: Dr. William Charlton, CFA and David Hyman, CFA (Mercer Investments), Scott Burns (Morningstar)
The wealth space is moving more and more toward an institutional way of approaching investing. Data shows that retail investors are increasingly favoring investments that “unbundle” managers and strategies from traditional vehicles like mutual funds.
Data from “The State of U.S. Retail and Institutional Asset Management 2018” from Cerulli Associates shows that retail separately managed accounts (SMAs) and their brethren have been growing at a rate twice that of mutual funds over the past decade.
We explore what this trend means for financial advisors and clients they serve.
What’s driving the institutional investing trend?
Advantages in the institutional investing space for advisors include lower-cost options, access to high-quality managers, and the ability to customize strategies for clients’ needs. And in addition to the investment merits, advisors can leverage SMAs and their associated technology to provide increased tax management and single custody solutions for clients.
In order for a wealth practice to invest like an institution, they need to elevate their view of investment research up from the fund or vehicle level to the strategy level. Strategy-level investment research means understanding and selecting a manager based on their barest essence: the management team, investment process, past gross returns, and parent company. From there, financial professionals seek to identify the best way to implement the strategy and the related fees.
By moving to a strategy-level view of the world, an advisor also gains exposure to a host of managers that are not available in traditional wrappers and potentially increases the quality set of available investment options.
Exploring the alternatives universe in institutional investing
One example of the available options is the alternatives universe, which institutional investors have leveraged to improve the long-term risk/return profile of their portfolios. The Cerulli report shows that institutional investors, especially those in the endowment and foundation world, have steadily increased their exposure to alternative investments over the past decade.
Certainly, alternative investments can require a longer time horizon, have limited liquidity, and offer a distinct risk/return profile. But as the range of retail-accessible vehicles (for instance, multi-manager portfolios) increases, advisors are considering these options for retail accounts in order to help improve clients’ risk/return profiles.
Understanding these strategies and their managers, from both an investment and operational perspective, is of utmost importance—another reason why we believe wealth managers should implement an institutional approach to research.
Access to the institutional investing space
As financial intermediaries and advisors face pressure to deliver high-quality products at lower, more transparent costs to their clients, the boundaries between individual and institutional investing are becoming blurred.
Sophisticated investors and financial advisors must be able to evaluate a growing, changing universe of investment managers and products. This makes having the right tools to efficiently deliver customized analysis and reporting, as well as distinctive investment opportunities for clients, more critical than ever.
In light of this environment, Morningstar and Mercer have engaged in a strategic alliance that marries Morningstar’s collective investment portfolio analytics with Mercer’s comprehensive data and qualitative strategy research, all on one inclusive platform. This single access point empowers individual investors by enabling them to explore the expanded universe of investment vehicles—which is essential for an investing world gone institutional.
To learn about what’s driving institutional investing trends and how this approach can elevate investment strategies, visit our website or contact us below.