Getting re-educated on their long-term savings potential, their clear distinction from target date funds, and synergistic effects with retirement income solutions is a must for future-focused planners and fiduciary advisors.
by David Montgomery, C(k)P®, CPFA®, AIF®, CRPS®
Managing Director, Retirement Plan Services, Concurrent
I can still see myself, a number of years ago, sitting in front of a trusted colleague as they asked me to consider having our firm offer proprietary advisor managed accounts.
My answer was a flat-out no.
An AMA is a highly personalized, efficient retirement planning service provided via an institutional retirement plan, such as a 401(k) plan. It takes into account factors such as age, income, location, savings rate, current amount saved, marital status, risk tolerance, etc. AMAs are typically offered by advisors who have a registered investment advisor that has created an AMA solution for their use.
Overall, they aim to efficiently and cost-effectively help retirement savers invest and save for their personal situation.
However, to my knowledge then, these accounts were nothing more than expensive target date funds. They were fiduciary nightmares, rife with professional conflicts of interest and high fees. Portability from one recordkeeper to the next was also a headache. I could hardly believe my colleague had even suggested it.
But as weeks ticked by, his question nagged me. My colleague was also an expert in the retirement planning field, someone whose opinion I valued highly.
In the spirit of professional competition, or maybe even personal pride, I took to making myself the expert on AMAs, so I had the research to back up my concerns.
But the further I dug into my research, the more I found myself slowly seeing the merits of these accounts. I pored through legal documents and white papers, making sure to avoid opinion-based articles. I also had many meaningful discussions with my then chief compliance officer.
At the time, I read a Morningstar study, learning that plan participants who were defaulted into managed accounts saved 2% more of their salary, on average, than those defaulted into target date funds. After months of tireless research, I could finally admit that I had been wrong about the benefits of AMAs for both clients and advisors.
If AMAs on average helped plan participants save 2% more of their salary each year, that means these accounts are well-suited to young people. It’s basic math. If someone opens an AMA in their early twenties and is saving more than their counterparts with target date funds, that’s a significant gain when accumulated over a long period of time. These gains can, of course, also benefit older people who want to begin retirement planning in earnest.
People with small account balances are not usually the target of wealth managers. But even if a potential client has low savings, AMAs can help create a financial plan that will reap benefits long-term. The personalized aspect of managed accounts allows for a plan that’s intended to help accumulate long-term retirement savings, whether an employee has a large or a small balance and regardless of age.
I also realized those findings negate one of the perceptions of AMAs, which is potentially high fees. If plan participants are saving more of their salary by utilizing managed accounts, then the potentially higher costs are less impactful. I also discovered that the perception of high fees depended on what people were comparing them to.
For example, people often compare AMAs against the low-cost index target date funds. However, the judge in a recent court case (Hanigan v Bechtel Global Corp., E.D. Va., No. 1:24-cv-00875, complaint 5/24/24) even commented that target date funds are not a meaningful benchmark for managed accounts.
The compounding effect of retirement income solutions within AMAs is another avenue to impact retirement savings. If we can eventually insert 3–5 retirement income solutions into AMAs as potential options for the service to choose from, you add greater ability to efficiently provide the best-fit income solution for an individual’s specific needs.
Taking it a step further, adding AMAs into pooled employer plans, a 401(k) retirement plan that allows unrelated employers to participate in a single managed retirement plan, can make these solutions even more widely accessible. It is a simpler way for employers to manage plans, helping more people get on track for a secure retirement.
AMA plan participants do not necessarily have in-person meetings with an advisor, nor do they go in-depth into the highly complex situations the ultra-wealthy often have. This is certainly a different experience than working with a fee-only planner, but for the typical person trying to sleep better at night by having professional help, AMAs are able to handle most, if not all, of their planning needs.
If an AMA participant wishes to have a more personalized conversation with a live planner, those meetings can be held via a virtual video platform or over the phone. Unlike fee-only planners who gather data manually through questionnaires, AMAs start by using data feeds (from sources like payroll) to efficiently gather information. Fee-only planners gather this data manually through questionnaires.
No one retirement plan, or any financial investment tool, is perfect. The fiduciary issue associated with AMAs is still a valid concern. A firm that acts as a retirement plan fiduciary and charges an additional separate fee for proprietary advisor managed accounts can only offer them as an additional separate service, which puts the liability of the account into the employer’s hands. This issue is a frustrating one, and an understandable concern of employers who don’t want to have to take on that liability.
However, after the years I’ve spent researching, speaking with other experts in the industry, and connecting with advisors, I believe the benefits of offering advisor managed accounts still outweigh the current drawbacks.
The most important lesson to take from my reeducation about AMAs is this: advisors and retirement plan fiduciaries should do the research themselves to understand if these accounts are right for their practice to offer. But ignoring AMAs outright because of outdated misconceptions can stop plan participants of all backgrounds from receiving personalized retirement planning and portfolio construction and management. There’s value in AMAs both for the plan participants, who will receive highly individualized retirement plans, and for the advisor, who will be helping clients from all walks of life pursue their retirement goals.
Advisor managed accounts are the future of the retirement plan industry. Reevaluation of these accounts is only growing and adoption of them as offerings along with it. Waiting until all the wrinkles are ironed out of AMAs will only make advisors late to the game, hindering growth opportunities for clients. As interest in AMAs from industry professionals continues to grow, I am conducting ongoing research to explore innovative ways to make offering AMAs to clients easier for advisors and heavily reduce or eliminate the current fiduciary liability difficulties.
After all is said and done, I only have one question about advisor managed accounts left: Which advisors will seize this growth opportunity for their clients’ retirement plans and which advisors will be left behind?
David Montgomery is the Managing Director of Retirement Plan Services at Concurrent Investment Advisors. He has two decades of experience in the retirement plan industry and he’s a frequent speaker on topics such as managed accounts, retirement income, PEPs, and small market solutions.
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