Potential new mandates sourced through existing relationships with sponsors have increased consistently from 2016, according to new research from Cerulli Associates, a global research and consulting firm. In 2016, the source accounted for a total of 22%, while in 2018 it ticked up to 26%. Correspondingly, new mandates from proactive sales efforts have declined from 42% to 36% in that same period.
Cerullis data suggests that sponsors are placing more importance on the growth of subadvisory partnerships with existing subadvisors. We find that many sponsor firms are seeking to use existing subadvisors where possible, states Brendan Powers, associate director of product development at Cerulli. As due diligence becomes more thorough, sponsors value the ability to leverage some firm specific due diligence they have already done. Additionally, they have tested out connectivity between the two firms and can benefit from increased economies of scale. By shoring up relationship management and client service functions, we feel that subadvisors will be well positioned to maintain the subadvisory business that they already have, and these positive relationships can open the door to new business.
Subadvisors will also be challenged as product development continues to take a back seat to product rationalization, especially within the mutual fund vehicle. Large broker/dealers, insurers, and sponsors are executing rationalization exercises and pruning products and investment options, removing strategies that have failed to accumulate assets, along with those that no longer fit into the strategic direction of the platform or subaccount lineup, and/or are a part of a broader cull in an effort to make due diligence more thorough. Access to fewer products hinders subadvisors from forging new relationships or sourcing new mandates.
Total U.S.-domiciled strategies managed by unaffiliated subadvisors in mutual funds, exchange-traded funds (ETFs), and retail variable annuity (VA) subaccounts, including VA subadvisory and variable insurance trusts (VITs), faltered during 2018, shrinking by 8.3%, continues Powers. And for the first time since 2010, the total number of new unaffiliated actively managed subadvised funds launched across mutual funds, retail VAs, and ETFs failed to eclipse 100, totaling just 95 for all of 2018.
Cerulli believes that subadvisors will need to heighten their focus on maintaining and growing existing relationships in the face of these headwinds. As the total number of funds decreases, Cerulli believes there needs to be more of a focus on relationship management and client service, explains Powers. These functions help maintain current relationships and could potentially prove more useful in winning new mandates. Subadvisors should not stop prospecting new relationships, but should understand the factors making prospecting more difficult.
Cerullis latest report, U.S. Subadvisory Marketplace 2019: Building Deeper Subadvisory Relationships reviews the overall state of the U.S. subadvisory market, which is done through a comprehensive market sizing, in addition to a more qualitative examination of the subadvisory relationship from both the subadvisor/sponsor and insurance/non-insurance perspectives. This report also includes a brief assessment of U.S. subadvisor opportunity abroad.
