Managed-account industry forges new path to advisers

DETROIT — The Money Management Institute is placing financial advisers front and center this week at its annual convention in Washington.
The agenda for the two-day conference — which includes sessions entitled “What Advisors Really Want — and What You Can Do About It” and “Today’s Advisors & Tomorrow’s Solutions: Solving Client Needs” — is indicative of where the trade group, and the industry it represents, are headed.
Although the MMI pegged assets in separate accounts at $889 billion at the end of March, up from $678 billion at the end of 2005 and from $400 billion at the end of 2001, the managed money industry clearly is expanding beyond pure SMAs.
What’s more, the financial intermediary fast is emerging as a linchpin in that expansion, which involves embracing a variety of investment products, such as separately managed accounts, mutual funds, exchange traded funds and individual stocks.
“The traditional separately managed account business, for the first time in 30 years, is at a crossroads,” said Leonard Reinhart, president of Lockwood, a Malvern, Pa.-based affiliate of Pershing LLC in Jersey City, N.J.
“It’s a fascinating period of time,” he added. “For 30 years, it was just separate accounts and mutual fund wraps, but what’s going on now is mutual fund wraps, separate accounts and adviser-directed accounts are all starting to merge.”
Evolution taking place
The evolution — something the MMI has been preaching about for more than a year — essentially shuffles the deck of an industry that developed from a basic formula of money managers, platform sponsors and advisers working in conjunction to bring what had been considered institutional-class money management to individual investors.
Remember the old ad slogan, “This is not your father’s Oldsmobile”? To paraphrase that slogan, this no longer is your father’s separate account.
The new model, which still very much is a work in progress, involves the continuing development of the much-touted unified managed account, which shifts the focus from a specific investment strategy, such as large-cap growth, to an overall portfolio that might include mutual funds, ETFs, real estate, alternative class investments and separately managed accounts.
“The MMI is coming to the realization that not everyone is suited for a separately managed account,” said Jeff Strange, senior analyst with Cerulli Associates Inc. in Boston. “The industry is trying to focus on the best ways to get solutions into the hands of advisers.”
As might be expected, some efforts are further along than others, and resistance abounds for all sorts of reasons.
By Cerulli’s calculations, fewer than a dozen UMA programs currently offer financial intermediaries a well-integrated menu of products and services.
But, as Mr. Strange points out, the definition of a UMA is not an exact science, meaning that a mutual fund wrap program that starts offering access to ETFs or separate accounts could easily be defined today as a UMA.
“Most UMAs right now will be more concentrated in the areas where they were originally developed, whether that’s mutual funds or separate accounts,” he said. “But it is in the spirit of a UMA, and it is an evolutionary process.”
UMA opportunities
For some in the industry, the UMA represents a golden opportunity for deeper penetration into the vast market of all manner of financial intermediaries — including wirehouse brokers, insurance agents, bank reps, independent brokerage reps and independent financial advisers.
“I find the [UMA] to be a very attractive alternative for some clients, because through one account we can offer allocation models,” said Mark Bredin, an independent adviser operating as Bredin Investment Services in Malvern, Pa.
Mr. Bredin, who oversees $130 million
in client assets, uses the Lockwood Investment Strategies platform for those clients where a packaged solution is appropriate.
“With this product, I have one performance number to explain to my clients,” he said. “They see the number and understand the results, and that has made our client meetings a lot easier.”
The LIS program, which offers 24 different packaged investment strategies that combine mutual funds, ETFs, real estate, fixed income, commodities and separate accounts, has grown to nearly $1 billion since it was quietly rolled out three years ago.
“We built it for advisers who are used to selling more packaged products,” Mr. Reinhart said.
Even back when it was all about single-strategy separate accounts, the financial intermediary was a key component of the process, because separate accounts, like the more-evolved investment management solutions, never were designed for direct distribution to investors.

“In order to provide the best level of service to our collective end clients, we as an industry need to try and do right by financial advisers,” said Bruce Aronow, co-chairman of the MMI conference and managing partner at Managers Investment Group LLC in King of Prussia, Pa.
Along those lines, the focus of the conference and that of the MMI in general is to drive home the importance of process over product by paying attention to what’s important to advisers.
“We used to be pushing products, and the financial advisers were packaging it. Now it’s more about trying to package everything all together to meet the clients’ needs,” Mr. Aronow added.
Model portfolios
The hot button right now involves meeting the needs of aging baby boomers, he said.
“As boomers move into the retirement phase, the focus shifts from accumulation to distribution, and our big focus is on helping advisers provide appropriate asset allocation and retirement services,” Mr. Aronow added.
Meanwhile, in the process of figuring out what advisers want, the industry is experiencing growing pains as some of the packaged solutions start to move separate account money managers further down the food chain.
Model portfolios, for example, which are emerging as a popular means of streamlining the allocation process, are seen by some money managers as a serious threat to profit margins.

“We’ve been approached by a number of firms that want us to provide updates of our portfolio for a model, but we’re not going to get caught up in that kind of fee compression,” said Michael P. Czajka, chief executive of Symons Capital Management Inc., a Pittsburgh-based firm with $300 million under management.
“We think there’s a huge market out there in some of the higher-end registered investment advisers, but I think there still needs to be a lot of education about separate accounts,” he added. “That’s why we’re sticking to our guns.”
As the industry evolves to include more model portfolios and packaged solutions, even as some money managers dig in with the more-traditional strategies, one prudent money manager approach is to diversify.
“I’m not smart enough to try and say what is the Holy Grail. That’s why as an asset manager I want to participate on all the platforms,” said Peter Cieszko, president of global distribution for Evergreen Investment Services Inc., the Boston-based asset management arm of Wachovia Corp. in Charlotte, N.C.
“Different firms will come out with different platforms, and different advisers will adopt different platforms,” he added. “I don’t believe there will be an epiphany, where all of a sudden everybody adopts one platform.”

Related Topics: Separately Managed Accounts (SMAs)