Morningstar Investment Management and asset manager Dimensional Fund Advisors are launching an automated managed accounts service for financial advisors and RIAs, to bring customizable planning and investment advice to clients in retirement plans.
The platform expands the Morningstar Retirement Manager user interface to bring clients with smaller account sizes “high-quality, personalized advice at scale, just as the independent advisor has disrupted wealth management,” the companies said in a statement.
“Financial planning is segmented off for individuals who are typically somewhere around the million dollar mark,” Dan Bruns, head of managed accounts at Morningstar Investment Management, tells Financial Planning. “Less than that, it’s a little bit hard to find high quality financial advice. That’s where a solution like this really thrives, for people who maybe don’t qualify for financial planning but still have the exact same needs from both a planning and investment standpoint.”
Unlike target date funds within 401(k)s, which consider only a client’s chosen retirement age when setting a glidepath, managed accounts can consider unlimited data points, Bruns says. There are about 60 “user-defined” data points that can be added in Morningstar’s system, including age, state of residence, salary, account balance, sponsor match, contribution rate, pensions, retirement age, spouse’s retirement balances, and more.
Ashish Shrestha, head of advisor defined contribution group at Dimensional Fund Advisors, says that though target date funds are an improvement to static model portfolios, managed accounts are “the next evolution.”
“Rather than taking just one data point, which is a person’s age, the managed accounts can now incorporate a series of different, additional inputs that reflect the individual circumstances of participants,” Shrestha says. “That is the key benefit: your advisors are able to bring much more of a financial planning type of experience within retirement accounts that many of them, with wealth management clients, have been able to deliver for their more affluent clients.”
Andrea Feirstein, managing director at AKF Consulting Group, agrees that managed accounts are the “continued evolution of best-thinking about retirement solutions.”
“When you think of it, with each advancement in setting default options, the industry has improved the potential outcomes for participants. Moving from risk-based to target date was a significant enhancement; taking this one step further to more customization for an individual similarly should enhance the outcome,” she said. “Generally I think the approach is very smart because it adds the tech advancements made by entities like Morningstar that incorporate a broader range of inputs to craft investment solutions.”
There’s been a move in the defined contribution space to offer more customizable platforms, “and it’s been building in the industry for years now,” Bruns says.
“If you go back to other aspects of your life, everything is personalized. There are like 50 different colors of iPhones you can choose… It’s kind of crazy that retirement accounts are largely still invested in a very generic manner,” Bruns says.
Bruns says the customizable managed accounts service can “inform the investment strategies delivered but also inform things like: How much do I need to save? When can I realistically expect to retire? When’s the right time to take Social Security benefits given my unique situation?”
Dimensional is the first asset manager to join Morningstar Investment Management. Bruns says they blended together Morningstar’s technology and record keeping framework with Dimensional’s “rich heritage of innovation, deep investment methodologies, and it really makes this solution that much more compelling for advisors.”
The new platform serves as a hub connecting plan sponsors, 14 RIAs, and 10 recordkeepers with Morningstar Investment Management’s technology, methodology, and fiduciary accountability, according to the statement.
The fee structure for Dimensional Fund Advisors is 12-30 basis points, and for Morningstar, plans under $20 million are 20 basis points; over that, 17 basis points, “as well as any fees that the advisor wants to tack on which is at their discretion,” Shrestha said.
The service is meant to be used by advisors working with plan sponsor clients “that increasingly seek to offer individualized allocations and retirement investment advice to their plan participants. It is a platform that enables advisors to provide personalized retirement advice in a scalable manner,” Bruns says in an email.
If a plan sponsor wants to, the solution can be offered by default so that all participants can use it automatically. “Or they can say, participants over the age of 45 should use a solution like this, and under the age of 45 can use a target date fund,” Bruns added.
Bruns says “this solution is going to let advisors bring a service to their plan sponsor that they otherwise couldn’t. It’s going to help advisors add alpha to the equation… in terms of what they can bring to a plan sponsor, and ultimately the participants.”
“The advisor is central to the successful implementation of this type of a solution,” says Shrestha. “The advisor oversees how it gets implemented in a plan alongside other investment options. The advisor is the one that truly is the key to success in terms of making sure that plan participants actually engage and utilize the service, because in the absence of that oftentimes what we find and what we see is that, even when this type of an offering is made available, it doesn’t get utilized.”