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September 01, 2001 at 08:00 PM
Separate accounts are soaring. A snapshot of the last six years shows assets under management in these accounts have quadrupled, blossoming from a little under $75 billion at the end of 1994 to $275 billion by March 2001, and are likely to surpass $650 billion by the end of 2005, according to a new report by Cerulli Associates.
In its latest report in The Cerulli Report series, Asset Management: The State of the Separate Account Consultant Programs, the Boston-based firm also found that the overall size of the managed accounts industry reached $727.8 billion in assets by the end of the second quarter. This figure represents an 0.62% growth rate over the first half of 2001, and a healthy increase of 8.85% over the $668.6 billion recorded at the end of the first quarter, Cerulli says. In comparison, over the first six months of 2001, long-term mutual funds saw a decline of 4.07% while the Wilshire 5000 index fell 5.79%, showing that investors have maintained their interest in managed accounts despite lagging mutual fund growth and drooping equity markets.
More and more asset management providers are offering separate accounts because they quench affluent clients’ thirst for customized, tax-efficient vehicles. Just this year, SEI Investments and the Boston-based distribution firm Sincere & Co. ventured into the separate accounts business, and Fidelity Investments expanded its separate account management program to include individual fixed-income securities as part of an overall asset allocation strategy through Private Portfolio Services. SEI launched its program in April, and by July experienced inflows of $500 million. In June, Sincere & Co. launched its private-labeled, Internet-based, turnkey managed accounts platform exclusively for fee-only RIAs, featuring a select group of respected money managers representing a variety of investment styles.
Unlike other providers, Richard Sincere, president and CEO, says his firm is weeding out undesirable portfolio managers by using returns-based analytical software from Markov Processes International Corp. called mpi Stylus Pro. The software screens a manager’s investment style, efficiency, and competitive position against his peers. In developing the platform, “I saw that a number of firms were going to make the same mistakes that they made with mutual funds, that they were going to have open architecture and open their doors to a number of firms,” Sincere says.
He says other firms are choosing money managers based on the size of the firm and the amount of assets they can bring to the table, instead of using returns-based or quantitative analysis. Sincere says he’s also going to limit the number of money managers on the platform to between 20 and 25, to include only those that have gone through quantitative and qualitative analysis. “We will get the names we’re looking for by September or October,” he says.
For its qualitative analysis, Sincere says the firm plans to hire a well-known industry veteran who’s been in the investment management business for 27 years, and who’s chairman of a major corporation, to perform the qualitative analysis. He declined to name the individual. “I had been interviewing managers, but I decided to move it up a level,” Sincere says.
Besides being able to choose from a nationally ranked list of money managers, RIAs, upon agreement, can add managers with whom they have an existing relationship. RIAs can also choose to custody assets with Fidelity, Schwab, TD Waterhouse, and Pershing. Other custodians will be added as well. Sincere’s platform also enables investors to access separate accounts at a lower minimum of $100,000, depending on the manager. Another benefit is that the managed accounts’ Web sites are private labeled and carry the planning firm’s moniker.
Viggy Mokkarala, an Oberon Financial Technology, Inc., founder and VP of marketing and business development–the Sunnyvale, California-based firm responsible for developing Sincere’s technology platform–says the firm is working on new optimization tools that will allow advisors to customize a client’s account for tax purposes, cash management needs, and security restrictions. “The advisors have an advisor console where they could be tweaking the investment policies of a client on an ongoing basis,” Mokkarala says. “You could get in [to the console] and say, ‘My customer’s situation has changed. His wife has bought a bunch of Cisco stock, and I don’t want that to be purchased anymore in my client’s account.’ The advisor would go online and make all those specifications and they would be reflected operationally in the client’s account. [Advisors can] optimize [the portfolio] for other holdings, and therefore that would be translated into security restrictions that the portfolio would have.” He says these enhancements are being beta-tested now, and will be demonstrated at the Financial Planning Association’s annual meeting in San Diego, which starts September 13.–Melanie Waddell
How Are We Doing?
A report culled from online ADVs yields some interesting tidbits about the profession
Unless you’ve been engaged in a leisurely stroll across the Himalayas the past few months, you’re aware that the SEC’s scheme to file and maintain Form ADV data on the Internet is alive and well as the elaborate electronic filing system known as IARD (Investment Adviser Registration Depository). For those who’ve forgotten IARD’s purpose and are eager for early system results, a new report details all.
“Evolution Revolution: A Profile of the U.S. Investment Advisory Profession,” is a collaborative effort of National Regulatory Services and the Investment Counsel Association of America. The July report notes that SEC rules issued last year calling for a Form ADV overhaul also require advisors to make filings of the revised Part I of Form ADV via IARD. IARD is designed to benefit advisors and the public alike. Consumers are given free access to vital advisor information drawn from these filings, enabling them to judge the relative merits of advisors. As for advisors, IARD is meant to ease some of the regulatory busywork by permitting electronic filing.
The report covers the 6,649 federally registered investment advisors who held $18 trillion of discretionary assets as of May 1, 2001.
While some of the data is amusingly ambiguous–for example, 251 firms report having zero clients while 67 of those firms report having assets under management–there’s much of interest. Most investment advisory firms, we learn, are relatively small: 3,092 (46.5%) firms have only one to five employees; and 1,297 (19.5%) investment advisors have between six and 10 employees. As for who does what, 4,226 (64%) firms have one to five employees who perform investment advisory functions; and 1,037 (16%) advisors employ between six and 10 individuals to do the same. Also: 2,371 (36%) of investment advisors are affiliated with broker/dealers; 1,385 (21%) with investment companies; and 2,338 (35%) with other investment advisors.
The free report is available at www.icaa.org/public/icaanrsbooklet.pdf.–Cort Smith
All the President’s Men
Two recent Bush administration appointees are of particular interest to advisors. The first is New York securities lawyer Harvey Pitt as chairman of the Securities and Exchange Commission. Pitt was confirmed by the Senate August 1 and sworn in at a private ceremony a week later.
It may seem ironic that the same man who represented Ivan Boesky will assume the role of chief Wall Street watchdog. Yet the appointment was hailed by many as a good choice. Financial Planning Association President Guy M. Cumbie’s reaction was typical: “The FPA is pleased that someone with his impressive knowledge and expertise in the practice of securities law has been selected to lead the SEC in a time of incredibly rapid changes in the financial services industry.”
Indeed, most who voiced an opinion on the appointment coupled their remarks with mention of the hefty task facing Pitt. Advisors in particular will be watching Pitt’s actions on the so-called Merrill Lynch rule. That proposal, first floated in November 1999, would allow brokers offering extensive financial planning services the liberty of not registering as investment advisors with either the SEC or the state. Thus far, Pitt has only said that he will approach all topics with an open mind. The FPA has already asked to meet with Pitt to discuss the topic.
The second appointment involves Hector Barreto Jr. of Los Angeles as administrator of the U.S. Small Business Administration. Barreto is a broker and a long-time member of the National Association of Insurance and Financial Advisors. Last year alone, the SBA guaranteed more than $10 billion in loans to more than 43,000 small businesses.–Mike Jaccarino
Back to School
Despite the democratization of investing, a survey shows that consumers still need schooling
A recent survey conducted for the Securities Investor Protection Corporation and the National Association of Investors Corp. found that 85% of U.S. investors do not know enough to pass a “survival” investing quiz. The five-question test–given by phone to 2,067 adults across the U.S. in late May and early June–was meant to gauge investors’ ability to handle their finances in times of market downturns, to combat investment fraud, and to deal with problem brokers.
“We did find it disturbing that these fairly easy questions weren’t dealt with very well by the majority taking the test,” says Stephen Harbeck, general counsel of SIPC. “Eighty-five percent of investors surveyed didn’t get three of five answers correct.”
Among the key findings: Almost two in three investors do not know what to do when they suspect they are dealing with a problem broker. More than four in five investors do not understand how margin calls work. And fewer than one in five investors realizes that there is no insurance against market downturns or market fraud. “One-third of investors thought the SEC would provide insurance against market losses,” says Harbeck.
