Envestat is a series of monthly reports that deliver powerful insights, trends, and predictions about investor behavior and advisory practices brought to you by Envestnet. Each edition focuses on a specific area of interest shaping the industry.
We intend to offer industry leading insights through the intersection of our data and human capital. This is part of our deep commitment to empower advisors with better information to grow their business and better serve their clients.
We thought it might be interesting to take a look at the shifts advisors made in managed account investment programs in 2018. We wanted to see where assets moved and which programs were favored.
We pulled and analyzed data on more than 38,000 investment switches advisors made during 2018 and came away with some compelling takeaways.
This past December felt like the Grinch was staging a coup to steal our holiday cheer, obliterate year-to-date returns, and create angst among investors. Then lo and behold Santa finally arrived in January. Better late than never. The markets rebounded, and investors breathed a sigh of relief. We experienced the most hair-raising part of a roller-coaster ride in those two months. This was a major wake-up call that volatility is back, and we better be prepared for more exciting rides in the future.
Greater Risk Led to Bigger Losses
We’ve been on quite the roller coaster ride in the last quarter of 2018. Market volatility has returned. Perhaps that is a sign of a more normal market environment, but that’s not the point of this Envestat. Market volatility often drives investors into emotional and perhaps irrational behaviors. So it matters how a portfolio is constructed and managed.
Given the extreme volatility in December, we thought we would look at performance and standard deviation data for both advisor-driven models and fund strategist portfolios (FSPs) that month to see how market volatility has affected clients on the Envestnet platform.
Deciding whether outsourcing portfolio management is right for you and your clients
Successful advisors view the year end as an opportunity to assess their business from a revenue source perspective to make informed decisions going forward. With that in mind as 2018 draws to a close, we thought it would be worthwhile to examine current advisory and client fees on Envestnet’s platform.
The fee data we pulled from Envestnet Analytics covered more than 10,000 advisors in each account tier and managed account product. The only exceptions were investor accounts with more than $1 million in assets and separately managed accounts, both of which captured data from more than 5,000 advisors.
The equity market was generally kind to investors during the first three quarters of 2018. Then October hit. Volatility was back. Technology stocks were pummeled. Each day seemed painful for investors.
Are you confident you are choosing the best managers for your clients? The data may surprise you.
The desire to structure and manage client portfolios is oftentimes part of the advisor’s value proposition. Selecting investments and being responsible for those decisions can be a worthwhile endeavor. But how effective is it in the long run?
Given that a major portion of industry managed account assets are in advisor-managed programs (APM)—some $1.5 trillion—we thought it would be useful to look at the performance of these portfolios, not only year to date as of 7/31/18 but over one-year and three-year periods, as well.
We dug into the data held on the ENV Analytics platform to answer a few fundamental questions:
-What percentage of advisors are outperforming their benchmarks and delivering alpha?
-What percentage of advisors are generating negative returns for their clients?
-What differentiates top-performing vs. bottom-tier advisors?
With the first half of 2018 now behind us, it’s a great time to trace how managed account programs have fared thus far this year in terms of sales, redemptions, and net flows.
So we ran the data to learn:
• What was the increase/decrease in sales and flows in the first half of 2018 as compared to the same period in 2017?
• How did the product distribution of sales and flows compare to 2017?
• Did redemptions have a meaningful impact on net flows?
The investment community is rife with questions about the market effect of rising interest rates and January’s return of market volatility. So we thought that analyzing inflows on the Envestnet platform could provide some perspective on whether the market is reflecting less risk and, secondly, which asset classes are experiencing the most movement. We found that the composition of inflows has indeed begun to shift, consistent with a more cautious mindset.
The investment world is abuzz these days with impact investing—including Environmental, Social, and Governance (ESG) and Socially Responsible Investing (SRI)—which enables investors to sync their portfolios with their values and principles. Millennials and women in particular are expressing demand for this capability, but advisors have been slow on the uptake. But, does this hold true with advisors who use Envestnet's platform?
In our May Envestat, we set out to address some key questions:
- -How concentrated are total returns across APM, FSP, and UMA portfolios?
- -What accounts for the extreme outliers?
- -How can advisors avoid excessive volatility in their clients’ portfolios?
One consideration advisors must weigh when contemplating outsourcing is the impact it may have on fees. With this in mind, we thought it would be worthwhile to examine the economics of APM and FSP programs to help advisors determine which approach makes sense for their practice.
As noted last year, fund strategist portfolios (FSPs) are growing at a healthy pace. This prompted us to explore whether increased usage of FSP products by advisors on our platform was having a material impact on overall managed account sales, flows, and assets.
How are managed account assets projected to grow over the next 6 months? In this Envestat report, we analyzed past managed account data to come up with a forecast for gross sales, redemptions, and net flows for the first half of 2018.