Some SMA money managers ‘saying goodbye’ to the biz

DETROIT — The latest evolution of the $800 billion separately managed accounts industry is expected to force more money managers to rethink their commitment to the business, sending ripple effects all the way to the financial adviser and individual-investor levels.
“There is already a squeeze on money managers, and that will only get worse,” said Frank Campanale, head of Campanale Consulting Group LLC in Birmingham, Mich.
Mr. Campanale, who said that some of the industry’s roughly 200 money managers already are “saying goodbye,” pegged the changing attitude to a new business model in the works at Merrill Lynch & Co. Inc. that could cut fees paid to money managers by up to 30%.
The New York-based wirehouse, which is among the dominant
separate-account-platform sponsors, is said to be converting to a model-portfolio-based program that boils down a manager’s role to simply submitting a list of positions for a specific strategy.
The actual trading and many of the back-office functions traditionally handled by the money manager would be handled at the sponsor firm under the new plan.
“I’d neither confirm nor deny that there is anything new in the managed-accounts space,” said Merrill spokesman Erik Hendrickson, who declined to comment beyond an e-mailed statement.
Business reverberations
Meanwhile, the industry in general already is talking about Merrill’s plan as a done deal and is focused on the broader implications to a business that has seen its growth rate slow in recent years.
“If this really catches on, some money managers will need to change the way they do business,” said Jean Sullivan, principal of Dover Financial Research in Westwood, Mass.
The latest data from The Money Management Institute in Washington —scheduled for release this week — show that the top 10 money management firms represent 31% of the industry’s total assets, and the top 25 firms represent 45% of the total assets.
It is possible that the effects of a broad adoption of the model-portfolio program could alter the money manager rankings radically, Ms. Sullivan said.
“Money managers have been squeezed for a long time with regard to fee compression, and the model-portfolio idea will further threaten money managers,” she said.
For some money management firms that haven’t been willing or able to develop the infrastructure necessary to link to some of the larger separate-account-sponsor firms, however, the model-portfolio system could represent an opportunity to enter the business.
“The model-portfolio program will be less attractive for money managers that have already invested in an infrastructure that they will no longer need,” Ms.
Sullivan said. “But for smaller money managers, this could be a way for them to become more competitive.”
Model-portfolio programs already are in place at some smaller platforms, including Curian Capital LLC in Denver, but so far, none of the wirehouse programs — which together control more than 70% of the separate-account business — have gone in that direction.
“Merrill is the 800-pound gorilla, and they could get a large rate of adoption by going in this direction,” said J. Gibson Watson, president of Prima Capital Holding Inc., a
Denver-based firm that evaluates money managers and sponsor programs. “The money managers in these wirehouse programs are really grappling with the notion of commoditization.”
The flip side, according to Steve Young, senior vice pres-
ident in Curian’s asset manage-ment group, is what the money managers are no longer respons-ible for under a model-portfolio system.
“We like to talk about what the money managers don’t have to pay for [by using model portfolios],” he said. “It is a more efficient model and justifiably should be priced appropriately.”
Fee crunch
The concern among money managers, according to Mr.
Campanale, is that model port-folios will become the industry standard, cutting management fees on a typical equity portfolio to about 0.28%, from an average of 0.4%.
“This could eventually lead to the sponsors paying a flat dollar fee for the model,” he said. “Some managers might like that, but others are going to say, ‘I don’t need to be in this business, because I can get better fees working with institutional investors.’”
Eventually, the separate-account programs might lose many of the better managers, Mr. Campanale added.
“My advice to a lot of these asset managers is to try and capture more direct and institutional business, because I think the subadvisory business is a diminishing asset,” he added.
Diversification is the mantra
at Evergreen Investments in Boston, where a full-court press is being applied to gaining market share in the managed-accounts business.
“A lot of managers are considering getting out of the SMA business because it’s not as profitable,” said Bill Taylor, Evergreen’s president of managed assets. “We think you have to look at it in the big picture and consider what separate accounts do for the rest of our business.”
At Evergreen, the asset management arm of Wachovia Corp.
in Charlotte, N.C., separate-account assets represent $2.7 billion of the firm’s $300 billion under management.
Separate accounts complement all the other products as “another arrow in our quiver,” Mr. Taylor said.

Related Topics: Separately Managed Accounts (SMAs)