Householding—providing services not just to individual accounts but to all the accounts held by a household—is being applied to a small percentage of client assets across the industry, but more than 70% of wealth managers say they’re moving in that direction, according to a Cerulli Associates report.
The account consolidation within a “unified managed household” (UMH) allows a financial advisor to be more strategic across the entire breadth of a client’s assets and can yield better outcomes, a service that, because it’s in its infancy, can still be a differentiator among financial advisors, the report said.
“If there’s $25 trillion in advisor-managed assets, this is less than $1 trillion, and probably a good bit less than that,” said Matt Belnap, an associate director at the Boston-based firm who wrote the report. “There’s a lot of technology that has to go into this, and it’s a pretty big evolution for the wealth manager on the home office level.”
While just under 22% of wealth managers said it was a significant priority for their firm, 50% said it was a moderate priority, according to the survey, which was taken in the fall and included more than 1,200 firms.
The biggest obstacle has been a technical one, the report said, as the two most important aspects of account management—performance and tax reporting—have always been handled at the account level.
“You have your mutual fund wrap account here, your ETF wrap account there, you might have separate account asset manager over here, and all this infrastructure is on an account level,” Belnap illustrated. “To reframe everything from account level to household level is a huge undertaking.”
And that’s why wealth managers expect the shift to take years, he said. “They’re taking steps to do it and it’s a priority, but it’s not something where you can snap your fingers and do it overnight.”
Once the technology in place, however, the wealth managers surveyed said they could see applying householding to clients with investible assets of $500,000 and above.
“This householding can allow for more efficient tax outcomes, as well as greater opportunities to customize portfolios to suit the household’s unique financial needs,” the report said, adding that the industry shift away from transactional brokerage to fee-based asset management augmented by holistic financial planning has put greater emphasis on the advisor-client relationship that householding requires. “Beyond aggregating a household’s accounts into one place, the UMH looks to manage accounts efficiently under a coordinated, systematic financial plan to maximize outcomes.”
Asset allocation determined algorithmically is the bedrock of a UMH program, the report said. Combined with other strategies, such as tax-loss harvesting, tactical rebalancing, managing concentrated positions, and even factoring in Social Security payments, it gives householding the greatest benefit for the client, while consolidating assets for the financial advisor, the report said.
“Part of the genesis of this is everybody is moving away from being a broker. Everybody is becoming fee-based, everybody is becoming that fiduciary financial advisor for their clients. More than half of all advisor assets are now managed in fiduciary relationships,” Belnap said. “Finding ways to differentiate are kind of key, so that’s why we’re seeing customization of investments through things like direct indexing and this holistic wealth management that incorporates something like householding.”
Because of this shift, clients are also getting used to the idea that financial advisors are more than stock brokers, and a simple performance report and discussion of security selection is no longer what they’re looking for when it comes to documentation, the Cerulli report said.
Given current economic uncertainty, 54% of clients surveyed said they wanted a written financial plan so they can see all their financial objectives laid out in one place and track progress. Back in 2008, another period of perhaps even greater uncertainty, only 37% of clients felt that way, the report said.