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Top producers say managed accounts can play an important role in clients investment strategies.

Even so, at least one major financial advisor offers a caveat: if financial markets are in the doldrums, a managed account can be “a double-edged sword.”

Managed accounts are programs in which client money is invested in accounts managed by institutional money managers or in a wide range of mutual funds.

During the first half of 2001, managed accounts grew slightly, according to a survey conducted by Cerulli Associates, Boston.

Data tracked by Cerulli indicated that assets grew 0.62% to $727.8 billion in the first half of 2001, compared to $723.3 billion during the same 2000 time frame. Growth over first quarter asset totals of $668.6 billion was 8.85%.

Managed accounts will continue to experience growth as Americans start saving more, says Ed Morrow, CEO of Financial Planning Consultants in Middletown, Ohio, and president of the division of financial advisors of the National Association of Insurance and Financial Advisors, Falls Church, Va.

Managed accounts “align the consumers long-term goals with the advisors goal for a steady income,” he says.

The advisor is helping the client by “staying the course,” Morrow says, noting that one value an advisor brings is a knowledge of funds and what funds within a managed account are staying true to their stated purposes. Morrow counts more than 750 investment decisions that a client needs to make and that an advisor charging a flat fee can provide.

Managed accounts are a “double-edged sword,” says Rick Patterson, a principal with Associated Planners Group in Madeira Beach, Fla., who is also a member of the Million Dollar Roundtable and a NAIFA trustee.

In a bull market, managed accounts can be a profitable way for an advisor to grow a practice by charging a fee of three-quarters of a percent, he says.

But, Patterson adds, “if, in a bear market or recession, you are still taking 75 basis points and losing 30%-40% of an accounts assets,” then clients are going to begin saying something.

“In the late 1990s and into 2000, everyone was jumping on the bandwagon,” says Patterson.

However, given current market conditions, some clients are jumping off the bandwagon. Patterson says that he knows of one firm that lost eight major accounts.

A producer who can demonstrate added value will be in a better position in this kind of environment, he continues. Knowledge of the clients other investments, risk tolerance, job position, age and responsibilities gives the producer a better idea of what investments should be included in the managed account, he says.

But there could be some shakeout for those advisors who focused their efforts totally on money management, according to Patterson.

There are two reasons he cites: you need to explain to a client why there is a significant drop in an account; and your fee is diminished because it is a percentage of a smaller total amount.

What will help the advisor offering managed accounts, Patterson adds, is developing a strong client relationship and educating clients about realistic expectations.

If a clients account posts a 28% return and the client complains that a neighbor had a 40% return, an advisor needs to explain that a 28% return is still a solid return, he says.

Patterson says he has heard of several cases of advisors who are considering basing their fees on performance. So, for example, an advisor might receive a 2% fee if a managed account posts a 20% return and one-quarter of a percent or 25 basis points if the account posts a 0% return.

Andrew Keeler, a certified financial planner with Everhart Financial Group in Columbus, Ohio, says that a 1% fee is typically paid for a managed account. However, he thinks it is a “horrible argument” to have fees based on performance because a client should not pay more because the market is strong. Rather, he continues, a client should pay a flat fee and give a manager incentive to grow a clients managed account assets.

One advantage of a managed account that an advisor can explain to a client, Keeler says, is the tax advantage. Managed accounts offer more tax flexibility than mutual funds because individual stocks within the account can be bought and sold, he explains. So, underperforming stocks within an account can be sold, creating a tax benefit because of the loss, and performing stocks can still post a return for the investor, Keeler adds.

However, he continues, the performance of a managed account is more difficult to track than that of a mutual fund, for which you can type in a ticker symbol on a Web site and get an account value.

And asset allocation can be more difficult with a managed account if there is only $100,000 to $200,000 in the account, he says.

Typically, according to Patterson, a consultant-managed account is reserved for those who “sell a business or win LOTTO” and have large amounts of assets to contribute.

According to the Cerulli survey, account minimums for consultant wrap accounts, a type of managed account, range from $100,000 to $250,000 and $10,000 to $50,000 for mutual fund wrap accounts.

Cerulli found that managed account assets now equal approximately 17% of the size of the long-term mutual fund business which held $4.25 trillion in assets at the end of the second quarter.

The Investment Company Institute, Washington, says total mutual fund assets totaled $6.895 trillion at the end of July.

Mutual fund wrap programs posted a 10.6% gain in assets during the second quarter, finishing at $128.1 billion.

The Cerulli survey also found that major wirehouses continue to dominate the managed account business with a 71.55% share of the business.

In second quarter 2001, the share of assets for Salomon Smith Barney and Merrill Lynch was neck-in-neck with 25.92% and 25.18%, respectively.

Consultant wraps, according to Cerulli, comprised the major portion of managed account assets with a total of 41.1%. In such programs, unaffiliated institutional money managers manage investors assets in separate accounts.

And proprietary consultant wrap programs, wraps managed by a firms internal management team, totaled $87.64 billion. Salomon Smith Barney had the largest share of that segment with $59.66 billion, followed by Merrill Lynch with $19.67 billion.

Fee-based brokerage garnered 20.2% of this industry followed by a 17.6% share for mutual fund wrap accounts. Mutual fund wraps charge an asset-based fee for services including account monitoring and portfolio rebalancing.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 24, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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