Separately managed account quandary

WASHINGTON — While advisers want their separately managed accounts made available on unified managed account systems, SMA managers fear that that will result in a loss of control over how their products are marketed.

The conflict between the needs of financial advisers and SMA money managers was highlighted by a study of financial advisers presented at the Money Management Institute’s convention here last week.

Market Metrics, a market research firm in Quincy, Mass., conducted a survey of several thousand financial advisers and broker-dealers that handle SMAs to determine what advisers want for their SMA businesses. The SMA market has nearly tripled to $889 billion, from $244 billion a decade ago.

“UMAs are the wave of the future,” Bob Cunha, a principal at Market Metrics, told about 400 money managers and brokerage firm representatives attending the Washington-based industry trade association’s conference.

However, UMAs, which simplify work for advisers by combining different types of investments into a single account, will not catch on unless money managers embrace them, added Joe Babiec, another Market Metrics principal.

Meanwhile, SMA managers are concerned that they will lose control over how their products are being marketed.

“For money managers, they get a little bit lost in the shuffle here,” said Julie Holland, a managing director in the New York office of New York Life Investment Management.

NYLIM, based in Parsippany, N.J., is a wholly owned subsidiary of New York Life Insurance Co.

“The way they’re packaging the money manager product in these kind of bundled accounts makes it a little more convoluted for the money manager to be marketing into [the UMA] system,” Ms. Holland said.

“It’s not necessarily a one-on-one sale” to financial advisers, as separately managed accounts have been, she said. “It’s very difficult to get [advisers] to focus on just yours,” Ms. Holland said, referring to money managers’ SMAs.

Brokerage firms are providing off-the-shelf packages for financial advisers in which SMAs already have been selected, giving the SMA money managers less chance to market their products directly to advisers, she said.

But UMAs make life easier for advisers, said Kevin Keefe, senior vice president of research in the Boston headquarters of LPL Financial Services, which also is based in San Diego.

UMAs consolidate reporting into single accounts rather than the multiple accounts that often are needed for different types of investments, such as mutual funds and separately managed accounts, he said.

“You’re getting it in as efficiently as you can,” Mr. Keefe said. “You are reporting on it from a comprehensive structure so that everything’s in one place, and in the middle, you’re providing some value-added investment management services that you couldn’t otherwise provide if they’re in separate accounts.”

A chief conflict between advisers and SMA money managers, according to a presentation given by the Market Metrics team, is over whether a managers’ performance is more important than the marketing support given to the advisers who sell their products.

Although 66% of the advisers in the survey rated the performance of the SMAs they used as their top concern, strong sales and marketing support could lead to advisers’ sticking with an SMA manager when markets fall, Mr. Babiec told the audience.

Even when advisers rate the investment performance of their SMA money manager excellent, advisers are almost twice as likely to fire the manager when they are displeased with the money managers’ support services, Mr. Babiec said.

Further, the possibility that the advisers will increase business with the money manager drops significantly when advisers receive less support, he said.

Getting more investment choices from the brokerage firms that offer the accounts is a top concern of Rob Olcott, managing partner with Olcott Consulting Group, an investment consulting firm in McLean, Va.
The firm invests about half of the $1 billion in assets it handles in SMAs, he said.

Most SMA platforms offered by brokerage firms provide only three to six different money managers for particular investment styles, Mr. Olcott said.

“Advisers want more choice,” he said. The issue becomes particularly acute for some types of investments, such as small-cap accounts, which often close quickly as managers receive more assets, Mr. Olcott said.

In addition, he said, advisers need more information about the due diligence conducted by brokerage firms that offer SMAs.

“Since they’re accessing the money managers through their sponsors [brokerage firms], and they are not doing the due diligence themselves, they’re relying on the sponsor to do the due diligence,” Mr. Olcott said.

“Advisers need as much information as possible about the people, the processes, the performance, in order to service their clients.”