Pivoting To Retail

Distributors are increasingly on the hunt for unique investment approaches for the retail channel, and they’re venturing outside of their usual supply chain to find them. An increased focus on personalization of the investment experience, regulatory constraints on advisors, and investor price sensitivity are driving a re-evaluation of strategy lineups and institutional players¹ are being invited to broaden their product sets on sponsor platforms. This year alone, we’ve seen at least an article a month referencing new entrants to the retail space, often with boutique or custom strategies. There’s been a lot of activity. And a good deal of success.

The retail market is different.

Managing institutional portfolios is complex, custom, and controlled. Practices and processes are designed to meet mandates and to satisfy shareholders. The retail market is different. With the sponsor platform as the client, institutional processes and practices need to be reevaluated – and redesigned – for scale. For some, this perspective shift can be uncomfortable², but a full understanding of the differences can help managers maximize profitability in the channel.

Maximizing profitability in the retail space requires a shifted perspective for:

• Trading: Trader alpha is key to institutional portfolio results. This is enabled through the institutional manager’s full control over execution. But the majority of SMA trades are executed with the sponsor firm, so the opportunity to achieve an incremental benefit via bespoke trading practices is limited. And so are the practices around it. In retail, sponsors are interested in a trade rotation plan and the managers’ adherence to that plan. “Fair treatment” works alongside best execution. The questions being asked include: How is trading rotated between the institutional and retail business lines? If models are delivered to multiple destinations, what is the delivery rotation of sponsors? And if SMA account trading is administered by the manager, what rotation plan is applied?
• Model Delivery: With institutional portfolios, the portfolio manager maintains discretion and the elapsed time from investment decision to trade execution is usually negligible. In model delivery, however, the portfolio manager’s intellectual property is communicated to a third party. The sponsor firms have discretion and may not immediately execute trades to implement the communicated model changes. This can result in differences between the institutional portfolio and retail portfolios’ performance.
• Performance: Institutional portfolio performance is often monitored, measured (and in most cases reported) daily. This practice is reflected in the managers’ investment process. But sponsor firms require only monthly performance reporting, usually in the form of composite returns. Consequently, the trading frequency associated with tightly applied drift parameters or rebalance guardrails for institutional portfolios is unnecessary and can impede performance for the individual investor.
• Exceptions: Energy and time is spent on the niggling details of retail distribution. Accommodations for sponsor and investor-level restrictions can unnecessarily delay market entry and ultimately impact profitability. Keeping in mind that retail-level restrictions have different implications than institutional mandates, the retail exception process can be simplified. Automated pre and post-trade restriction monitoring, and automated application of alternate model versions, typically provide the level of compliance required.

We’ve too often seen institutional managers’ entry to the retail space disappointingly delayed by an insistence on applying institutional practices to retail distribution. My suggestion to new retail market entrants is to rely on an experienced partner to establish your retail infrastructure. Validate the simplified operations processes as your distribution prowess grows. Only then begin to explore the custom reporting and other build-outs needed to fold the retail business more seamlessly into your legacy investment process.

Yes, the retail business is different. But in my view, once those differences are understood and accommodated, entry into the space can be simple, scalable and, most importantly, profitable.