Eager to stabilise profits with asset-based fees, broker/dealers are flocking to the burgeoning market for so-called separately-managed accounts.
Managed accounts have been around for decades, but once offered only the wealthiest investors access to portfolios handled by some of the country’s best institutional money managers. In recent years, there has been a dramatic mainstreaming of the wrap offerings.
By reducing minimums to just US$100,000 and bundling the portfolios with investment and asset allocation advice, the country’s largest broker/dealers have discovered a huge residual demand and steadier flow of revenues.
According to a recent report from Boston-based consultant Cerulli Associates, assets in separate account consultant programs quadrupled over the last six years in the US to US$275 billion as of March 2001. Cerulli expects the market to surpass US$650 billion by year-end 2005.
Merrill Lynch and Salomon Smith Barney account for about half of the industry’s assets, with elite tier-one reps at the two firms placing almost all of their clients’ investments in the managed account wraps.
Add Morgan Stanley, UBS PaineWebber and Prudential to the list, and New York-based wirehouses (national broker/dealers), and these account for about three-quarters of the assets in separate account programs.
Growth has not been limited to just the biggest players either. That 75 per cent market share is down from 87 per cent in 1993, while regional brokers have increased their slice of the industry from 10 to 17 per cent over the same period. Third-party vendors control 5.4 per cent of the market, up from 1.6 per cent in 1996, according to Cerulli’s report.
For the latter group, comprising mainly independent registered investment advisers (RIAs), take up is accelerating with the help of the industry’s largest service providers. Charles Schwab offers the unbundled Managed Account Select Program, for example, which offers independent planners access to institutional portfolios screened by the discount broker/dealer. Schwab gets a consulting and program fee, and RIAs charge for the advice.
The name separately-managed account is a little misleading, since it is precisely the advances in technology that allow institutional managers to pool assets, but account for them individually, that let them handle small sums.
Managed accounts, which cost about the same or slightly more than mutual funds, are said to have two main advantages: customisation and tax efficiency.
Investors are able to tinker with their portfolios somewhat, excluding a stock they might already own, for instance, or implementing their own ethical screens.
Minor adjustments also come in handy at tax time, as institutional managers tend to have a better grasp on minimising capital gains. Retail mutual funds, on the other hand, are inherently tax inefficient, usually holding hundreds of stocks, versus 50 or 60 in an institutional portfolio, and distributing capital gains to all unitholders.
As impressive as they sound, not all advisers are sold on managed accounts.
“It’s a case of how much we are paying and the value we think is being delivered,” says CFP Stephen Barnes, whose Arizona-based firm does not recommend them.
“What you get is basically a product off the shelf,” Barnes argues, explaining that at lower cost, he can offer investors a more customised solution using a combination of other managed fund products and individual securities.
While a supporter and user of managed accounts, Ohio-based CFP Chris Cooper also plays down the benefits. The more conservative a portfolio, the more he can make adjustments, he says, with changes limited to social screens and tax-related trades. Because more aggressive portfolios imply greater turnover, managers prefer unfettered discretion, he continues.
Cooper, who has invested his client’s assets with institutional managers for years after researching and seeking them out independently, nevertheless finds the mainstreaming of the products worrying.
“There are massive amounts of conflicts of interest,” he argues, pointing to the proprietary portfolios usually included in the offerings of the large broker/dealers and even Schwab, thereby giving the firms both management and consulting fees.
For investment managers, separate accounts represent a potential windfall, sitting at the apex between retail and institutional industries — the fast-growing high-net-worth demographic.
Institutional managers have so far won out in the battle for separate account assets, what with their greater expertise at purely investing money. Over time, however, retail managers are expected to dominate, as direct distribution channels to brokers and financial planners become more important.
For now, the field is wide open, with no single manager controlling more than six per cent of the industry’s assets.
