Managed Accounts Will Challenge Funds For Affluent Market: Study

Under this approach, a single account contains a number of sleeves, or subaccounts, emphasizing such equity investment strategies as large cap, small cap, growth or value. Each strategy is given different weight, based on the investors needs and preferences.

SMAs tax efficiency stems from the fact that, unlike mutual funds, they dont have to distribute capital gains automatically, so they can distribute only what gains or losses happen over the life of an investment.

Bevis notes that most funds are distributing losses this year, which gives them some tax advantages to new investors. He expects that may slow down their loss of revenue to SMAs “just a bit,” however, because managed portfolios also have their tax advantages. Typically, they are advised by tax overlay managers who can switch stocks between an investors portfolios and do other things to minimize taxes.

The battle between funds and SMAs will be most evident with large cap products, he observes.

“If separately managed accounts are successful, mutual fund companies that have had significant sales from large cap products are going to need to adapt,” Bevis says.

He believes, for example, that fund distributors will need to position their small cap and other sectors funds as a complement to large cap SMAs, rather than trying to sell large cap mutual funds head-to-head against them.

To maintain market share, mutual fund companies will also need to exploit the fundamental advantages of their product–professional management, diversification, pooling of investors, one-statement accounting and daily redemption/exchange at net asset value, FRC notes in its study.

“Fund companies will also need to exploit markets that are not as affected by the disadvantages of the product structure, such as a one-size-fits-all investment strategy, automatic capital gains distributions and the resulting tax implications and once-a-day buys and sells after the close of the markets,” FRC notes.

As for financial advisors currently selling mutual funds, they should stay in touch with their companys home office to stay informed of how to position funds against a managed account platform, Bevis advises.

They can also learn how to sell SMAs, he notes.

“A lot of distributors will build or lease an SMA platform,” he predicts. “Advisors should find out where their broker-dealer stands in product development of SMAs and get educated about it. If theyre not hearing from clients about SMAs now, they certainly will be in the near future.”

FRC is a unit of the BISYS Group Inc., New York.

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 16, 2002. Copyright 2002 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.