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The following article was originally published in FUNDfire
by Danielle Verbrigghe May 17, 2017
T. Rowe Price has entered the retail separately managed account (SMA) business, gearing up new adaptations of some of its mutual fund offerings. The firm is rolling out traditional SMA and model-delivered products as it aims to entice distributors with more options on how to access its strategies.
“The launch of our model delivery and retail SMA business is really designed to meet the strategic priorities of our firm and to better meet the evolving needs of our clients,” says George Riedel, head of U.S. intermediaries at T. Rowe Price.
The initial lineup includes U.S. growth and value strategies based on three existing T. Rowe mutual funds: the U.S. Growth Stock Fund, the U.S. Value Fund and the U.S. Blue Chip Growth Fund.
But this is just the start. Next month the firm plans to launch municipal bond retail SMAs. After that, the plan is to develop more fixed income strategies in SMA format, including core bond and core plus offerings.
To the extent that distributors and advisors may view “model delivery or the retail SMA as a lower cost investment vehicle to deliver and manage client portfolios, we want to make sure that we are able to participate in that,” Riedel says.
Having retail SMAs or models available is especially important as distributors are rationalizing product menus and limiting the number of asset managers they are working with, he says.
Distributors “are spending a lot of time and attention in ensuring they have the best asset managers included on their platforms,” Riedel says. “You want to ensure they have the right investment vehicles, end to end, to be able to implement decisions for their clients.”
The portfolios are modeled after existing mutual funds, with some adaptations to be better suited to the SMA format. For example, the SMA strategies target a smaller number of holdings. For example, an SMA strategy might have 40 to 50 underlying holdings, whereas the mutual fund version could have 80 to 100, Riedel says.
T. Rowe selected the equity growth and value strategies for the initial launch because the mutual fund versions are widely used on distribution partner platforms.
“The underlying mutual funds of those strategies are used extensively in the advisory platforms of many of the largest broker-dealers and private banks in the country,” Riedel says. “Allowing these broker-dealers and private banks to access a more institutionally priced version of these mutual funds for client accounts, I think, is a crucial component for growth both for T. Rowe Price, but also for these firms. To the extent these firms can recommend an actively managed T. Rowe Price portfolio at an institutional management fee, it allows them to elevate their value proposition over passive.”
T. Rowe Price is “really strong on U.S. equity,” so the new equity SMAs could be appealing investment options, says Katie Reichart, associate director of equity strategies at Morningstar.
“Traditionally they’ve done quite well with their U.S. equity mutual funds and they’ve performed very well.”
From a business perspective, moving into SMAs makes sense for T. Rowe, Reichart says.
“Right now for active managers, they’re having to take a close look at their businesses and make some changes to be more competitive,” Reichart says. “It could be a way for them to retain client assets in lower cost vehicles.”
A number of other big mutual fund complexes, such as Legg Mason, Nuveen and Eaton Vance have long been players in the retail SMA space. But T. Rowe has stayed away until now.
“When we first looked at this ten years ago, the technology was horrible,” Riedel says. “It was clunky. It was not seamless… The trading was poor. The execution was very poor. It has changed dramatically.”
To simplify entry into the SMA space, T. Rowe partnered with Archer for technology and operational support.
Archer, which provides SMA technology and operations outsourcing, has seen a surge in interest in the retail SMA and model business coming from asset managers that have historically focused on the mutual fund or institutional markets, says Bryan Dori, Archer’s president and CEO. Dori says Archer is currently working with five or six such firms who are new to the SMA market, and has many more in the pipeline who are considering launching SMAs.
Part of the reason is broker-dealer moves to rationalize product menus.
“A lot of the distributors really want manufacturers to have their product in every wrapper,” Dori says.
“If you have a big mutual fund distributor in a particular strategy, and you don’t have it across the board in other wrappers, that could hurt your mutual fund distribution,” Dori says. “There’s definitely a movement, if you will, of managers to make sure they have the capabilities not only in the fund side of it but also have SMA capabilities.”
Outsourcing some operational functions or technology to a vendor like Archer is a way for firms to enter the business without some of the headaches that can come with handling a higher number of accounts with lower minimums.
“Institutional mutual fund companies are typically used to managing high asset levels with low numbers of accounts,” Dori says. But the retail SMA business involves “lower asset accounts with a higher number of portfolios.”
To support the new business line, T. Rowe has added some staff to its product team to focus on reporting and marketing, but hasn’t made any additional distribution hires.
T. Rowe expects that SMAs could be a significant growth opportunity.
“We think it’s a significant growth area for the firm,” Riedel says. “We think that there’s an opportunity to not only take share from incumbents but also help our current platforms become much more robust and productive for themselves to raise new client money.”
One benefit of the SMA format for managers is that they don’t typically pay revenue sharing to distributors on those assets, says Richard DeSalvo, a strategic consultant to wealth and asset management firms.
“If I have an SMA, I don’t pay revenue sharing, or I’ll pay less,” DeSalvo says. “It could actually be a way for the fund company to either pay less or not pay any revenue sharing.”
When broker-dealers or other wealth management firms are determining product menus, “The challenge is to offer great products, but maximize their revenues,” DeSalvo says. “What they’re really looking for isn’t the best of the best, but the best of the best that can revenue share.”
Broker-dealers often collect a higher platform fee in single-contract SMA programs, in lieu of revenue sharing, but they typically aren’t getting that in dual-contract SMA platforms, which firms often offer as an accommodation, but don’t promote widely to advisors.
But SMA strategies also tend to command lower fees for managers, compared with mutual funds, particularly in sub-advisory SMA or model-delivery-based advisory programs.