From the July 2005 issue of Investment Advisor • Subscribe!

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How two industry leaders are helping advisors use separate accounts

Separately managed accounts were dreamed up years ago at a wirehouse--E.F. Hutton--and to this day they remain a key weapon in the arsenal of the major brokerage firms, which still claim three-quarters of the $600 billion housed in the separate account biz. But independent advisors are finally beginning to climb on the separate account bandwagon as well. We talked recently with executives at Linsco/Private Ledger, the nation's No. 1 independent broker/dealer, and Schwab Institutional, the leading custodial firm, to see how their separate account businesses are faring and what they have up their sleeves for advisors. Each firm reports rapid growth of assets in their respective programs and promises major improvements in the next few months.

LPL: Assets Double in a Year

LPL Manager Select offers the 1,000 advisors in the separate account program access to 150 styles from some 100 managers, including such well-respected names as AllianceBernstein, Brandes, Loomis Sayles, Nuveen, Thornburg, and Trillium, a specialist in socially responsible investments. With the list expanding steadily and LPL stepping up its efforts to help reps select managers, craft client proposals, and even outsource their asset allocation work, the bicoastal B/D, based in San Diego and Boston, reports its separate account business is growing like gangbusters. "In the past year, we've seen our separate account program double in size," says Bill Morrissey, a Fidelity Investments veteran who in 2004 became San Diego-based senior VP for LPL Advisory Consulting Services.

While a small number of LPL reps use third-party separate account providers, the bulk of the $2.3 billion under Morrissey's watch is housed in the firm's in-house platform, Managed Account Select. But even with the past year's growth spurt, managed accounts, not including mutual fund wrap programs, still account for about 2% of LPL's more than $100 billion in client assets.

Morrissey said that on July 15, however, LPL will roll out Integrated Advisory Services, a unified managed account service that will permit advisors to compete with similar wirehouse offerings by mixing mutual funds, individual securities, and individual managers in a single account structure with one fee for everything. LPL will probably add exchange traded funds to the program before long, Morrissey says.

With a minimum account size of $250,000, versus $100,000 for the basic Manager Select product, Integrated Advisory Services will offer 32 asset allocation models, supervised by LPL's registered investment advisor unit, and cost clients around 1.5% to 2% of assets annually, including all management and transaction charges, with a maximum charge of 2.5%, Morrissey says. That compares with an average charge of 1.8% in Manager Select, where the average account size is $267,000.

Integrated Advisory Services is the latest in a series of offerings at LPL aimed at taking some of the hassle out of working with separate accounts. For example, Manager Select Diversified Portfolios, which currently holds $275 million in assets, is one of two multimanager programs similar to the multistyle products used by wirehouses. The other, MIG, contains $74 million. Each has a $300,000 account minimum.

For advisors who want to pick their own managers, LPL offers a comprehensive research service run by in-house analysts who produce lists of approved and recommended firms. Recommended managers, notes Morrissey, must pass a more rigorous screening that looks at risk-adjusted performance, capture ratios, and management's investment philosophy, among other things. LPL analysts in San Diego can walk advisors through the manager selection process, if they wish, or reps can do their own research via the firm's Web-based tools. All the services are free.

LPL also offers Web-based training classes and conferences in the field for its reps. Among them are road shows where reps get to hobnob with asset managers as well as special managed account tracks in the three-day "Fast Forward" conferences LPL holds for reps in 12 cities.

Schwab: Focus on Breakaway Brokers

The classic image of the RIA who custodies with Schwab Institutional is that of a fee-only planner who builds a practice around mutual funds. While many Schwabbies fit that mold, nearly 1,000 of them also use separately managed accounts, which as of May represented $18 billion of Charles Schwab & Company's advisor assets. Registered reps working in Schwab's Private Client group account for another $4 billion in managed account assets. But the real growth is coming from the independent advisor channel, where managed account assets have swelled $4 billion over the last year. "We want to help advisors grow, compete, and succeed," says Schwab's John Morris, San Francisco-based senior VP for managed accounts and alternative investments.

The challenge for Schwab, acknowledges Morris, is not just to increase managed account assets. Although seven of Schwab Institutional's 10 largest custodial clients use managed accounts, the bulk of the discount broker's separate account business remains concentrated among only 200 advisors. So Schwab is searching for new ways to get more advisors into the game. Morris says one strategy is to convince breakaway brokers, those "corner office consultants at the big wirehouses" who already use managed accounts heavily, to join the RIA world and custody with Schwab. Some of these reps manage as much as $1 billion to $3 billion, making them tempting targets.

To help woo these reps, Schwab late this summer plans to roll out Managed Account Access. The program will offer many of the features of Schwab's Managed Account Select program, which currently has $1.5 billion in assets, minus its feature of manager research and ongoing monitoring by Callan & Associates, a financial consulting firm. Morris acknowledges that larger advisors who use managed accounts don't need this outside help because they typically have "pretty robust research areas with CFAs" to do their own manager due diligence. Cathy Clauson, a Schwab Institutional VP for product development, notes that Managed Account Access will also make it easy for brokers to move clients from a wirehouse to a Schwab Institutional account without switching managers. This can help both clients and advisors; switching managers can force sales of securities and produce unwanted taxable gains.

While Schwab is hoping that both Manager Access and Managed Account Select will bring new clients into the separate account fold, it is not neglecting its core product, Managed Account Marketplace, which alone accounts for $14.5 billion in assets. Founded in the 1990s when Schwab saw a need to help advisors who found themselves forced to make arrangements with asset managers on their own, the program now features more than 700 managers and is still growing. "We seek out managers," explains Morris. "Last year we added over 100 at the request of advisors."

While fees in the Marketplace program are negotiated between advisors and managers, those in Manager Access and Managed Account Select are governed by Schwab. Morris says that a $1 million client in Managed Account Select's equity program should expect to pay 86 basis points for asset management, transactions, research, and Schwab's support, plus whatever an advisor chooses to tack on for his or her fee. Assuming this brings the total cost of a managed account to about 1.61%, Morris says, "that feels like a pretty good deal" when compared with the 1.56% average expense ratio for mutual funds, which does not include transaction costs. Fixed-income account fees average 0.64% for million-dollar clients.

Schwab is also stepping up its advisor education programs. In addition to offering free assistance in its managed account research center for advisors looking to check on manager performance or craft client proposals, the broker is taking its show on the road. On October 10, Schwab will kick off a three-day conference in Boston for 100 to 150 advisors that will focus on managed accounts. Dubbed "Engage," the seminar will feature sessions on the advisor consulting process, manager selection, and winning new clients.

Editorial Director William Glasgall can be reached at bglasgall@investmentadvisor.com.

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