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Arman Salavitabar, CFA

Arman Salavitabar, CFA

Founding Partner, FundFront

Insights

Why Managed Accounts Lack Scalability: Key Challenges and Alternatives

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Managed accounts are investment portfolios managed on behalf of individual clients, tailored to their specific investment objectives, risk tolerance, and other preferences. While these accounts offer personalized service and flexibility, they also come with a range of challenges that impede scalability. As the demand for alternative investments grows, the limitations of managed accounts become more apparent, prompting the need for more scalable solutions.

Customization and Individualization

High Administrative Burden

One of the primary reasons the managed account framework struggles with scalability is the high administrative burden associated with customization. Each managed account requires individualized attention, including bespoke investment strategies, regular reporting, and compliance with client-specific mandates. This level of customization demands significant time and resources from investment managers, making it difficult to efficiently scale operations as the number of clients increases.

Complex Compliance Requirements

Managed accounts must adhere to a myriad of regulatory requirements, which can vary significantly depending on the client’s domicile, investment preferences, and other factors. Ensuring compliance for each individual account is a resource-intensive process, involving detailed record-keeping, frequent audits, and continuous monitoring. This complexity is exacerbated as the client base grows, further hindering scalability.

Operational Challenges

Limited Operational Efficiency

The operational processes involved in managing individual accounts are inherently complex and time-consuming. These include portfolio rebalancing, performance tracking, and customized reporting. Each account requires tailored solutions, which often necessitates manual intervention. This lack of operational efficiency limits the ability to scale managed account services effectively.

Technology Constraints

While technology can enhance efficiency, the bespoke nature of managed accounts means that technological solutions often require significant customization. Off-the-shelf solutions are rarely sufficient, necessitating bespoke systems that can handle the specific requirements of each account. Developing and maintaining such systems is costly and time-consuming, presenting a significant barrier to scalability.

Cost Considerations

High Cost of Service Delivery

The personalized nature of managed accounts means that they are typically more expensive to deliver compared to pooled investment vehicles. The need for bespoke investment strategies, detailed reporting, and individualized client interactions drives up costs. These higher costs can be passed on to clients, but they also limit the ability to scale services profitably.

Economies of Scale

Managed accounts do not benefit from economies of scale to the same extent as pooled investment vehicles. While pooling assets can reduce costs and improve efficiency, the individualized nature of managed accounts means that each additional client requires a proportional increase in resources. This lack of scalability in cost structures further limits the growth potential of managed accounts.

Alternative Solutions

Fund Structures

One scalable alternative to managed accounts is the use of pooled investment vehicles, such as mutual funds or hedge funds. These structures allow for the aggregation of assets from multiple investors into a single fund, enabling economies of scale and more efficient management. By pooling resources, fund structures can reduce administrative burdens and compliance costs, making them a more scalable solution for investment managers.

Securitization

Securitization involves the issuance of investment opportunities in the form of securities from the onset. This method can help make alternative investments more scalable by transforming illiquid assets into tradable securities. Securitization reduces the need for individualized management, offering a more efficient and scalable way to manage and distribute investments.

Technology-Driven Platforms

Advancements in technology have given rise to investment platforms that can streamline the management of alternative investments. Platforms like FundFront’s HUBS provide wealth advisors and distributors with a comprehensive tech solution to offer alternative investment opportunities directly to their clients. These platforms reduce administrative burdens, standardize data, and enhance investment accessibility, providing a scalable alternative to traditional managed accounts.

Conclusion

The managed account framework, while beneficial for providing personalized investment solutions, faces significant scalability challenges. High administrative burdens, complex compliance requirements, limited operational efficiency, and high service delivery costs all contribute to these limitations. As the demand for alternative investments continues to grow, investment managers must look towards more scalable solutions, such as pooled investment vehicles, securitization, and technology-driven platforms, to accommodate growth and improve efficiency.

Investment firms facing these challenges can benefit from exploring these scalable alternatives. By leveraging the right tools and structures, firms can enhance their operational efficiency, reduce costs, and better serve a growing client base. For those seeking tailored solutions to overcome scalability challenges, FundFront offers comprehensive services and expertise in structuring, global distribution, and investment platforms, providing a seamless and efficient fund management experience.

Written by:

Arman Salavitabar

Arman Salavitabar

Founding Partner, FundFront

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