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Separately Managed Accounts Not Just For Wire Houses Anymore

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New York

In the separately managed account industry, major wire houses have long held the majority of the assets. And while this will likely continue to be the case in the near future, other channels have been steadily groping their way into the distribution of SMAs, Kevin Osborn said recently at The Money Management Institutes annual convention here.

The senior vice president and director of product distribution for Prudential Investments, Newark, N.J., moderated a panel of speakers from different channels who discussed their companies experience with getting into the distribution of SMAs.

Osborn described Prudential Investments sponsorship of a managed account program as, “a big leap to what we consider a third party in the managed account business.”

Osborn began the discussion with what advisors, whether they are independent or work through a bank or some other channel, should know before getting into distribution of SMAs.

First, he said, advice is “back in vogue. “I think the markets of the last two years have made it clear that (clients) want the help.”

Secondly, he listed four core steps the separately managed account world has long believed advisors should take in the process of identifying and achieving their clients investment objectives: investment policy development; the development of asset allocation; the search and selection of different investment advisors; and the monitoring of performance.

But, going forward into new markets, it should be clear to advisors that these four steps are only the essence of what they need to do. Because different distribution channels present different challenges, identifying and achieving need to be tweaked to fit the channel, Osborn said.

For instance, in the banking channel, many clients will have estate and trust needs that will play as big a role as investment policy development, he said.

Osborn then gave a sense of the advantages and disadvantages of getting into the SMA business as a money manager or sponsor.

A sponsor who wants to get into the SMA business must first decide whether it wants to enhance its existing platform, get a new platform or start from scratch, he said.

“Youve got a lot of challenges in front of you; quite frankly youre late to the game,” Osborn said. “That doesnt mean you cant play, just youre late and you have a scale issue. Its expensive and market conditions have been against us.”

To distribute SMAs, an organization must decide what it wants to accomplish and what its commercial viability is.

“Do you want this to be a stand-alone business or is it a subset with another type of business that you do,” Osborn said. “For example, you might be a bank or an insurance firm thats really more in the insurance or wealth management business and needs this as part of the process.

“That would start to dictate the economics and how much time and money you spend in the business,” he said.

A money manager who wants to participate in the SMA business has to think about the number of due diligence meetings he can go to and how many trading systems he can be on.

Adele Lennig, vice president, Managed Accounts, American Express Financial Advisors, Minneapolis, talked about the companys experience as an independent brokerage firm that built its own program, which it expects to launch in June.

AEFA bought a portfolio management system and plugged the platform into its brokerage system, Web environment and client management system, rather than outsource or use a third-party provider, Lennig said.

A separately managed account usually is not the first product an American Express Financial Advisors client is offered, she said. Its typically the fourth or fifth product, so it was important to the firm that it be able to integrate the new platform into its existing environment.

“So, in the end were able to offer a unified managed account program and be able to offer our clients separately managed accounts, mutual funds, and eventually by the end of the year, hedge funds for one wrap-fee,” Lennig said. “One statement, one online experience.”

Jerome Paolini, director of Investment Consulting Group, Wells Fargo Bank, San Francisco, said there are two areas, either for a sponsor or money manager, that present a great deal of opportunity within the bank channel.

The first is the bank brokerage channel, which has 12,000 reps who typically sell in bank branches as part of a bank brokerage operation.

They sell mainly packaged products, mutual funds, annuities and do some general securities business.

“There are a lot of $800,000 accounts out there sitting in mutual funds that would be better served in a separate account, and thats what some of these banks need to consider as they evolve their business,” Paolini said.

Wells Fargo trained half of its staff of 1,100 financial consultants to sell separately managed accounts.

The other channel Paolini mentioned is the private banking arm of banks.

“Thats where I think the greatest opportunity lies for high-net-worth clients,” he said. Traditionally, banks have only serviced this client within its own trust department.

“A bank was in business to sell their own money management,” Paolini said. “You went to the bank, you met with a trust officer or private banker. Their job was to hand it off to a portfolio manager. It didnt matter whether it was a trust or whether it was just an investment management account, the goal was to manage the money internally.

“The banks are now waking up and figuring out open architecture, figuring out the fees they can garner by charging consulting services and also getting a greater share of the clients wallet, retaining assets and stopping assets from flooding out the door to the wire houses,” he said.

Wells Fargo rented a platform in 1998 from Morgan Stanley Dean Witter, New York, and put its name on it. The thinking was that if it were to be built in house, there would be bickering among the departments and nothing would get done. It was offered on the banks brokerage platform through the aforementioned 1,100 brokers.

“We went across the country teaching them the four-step process and indoctrinating them,” Paolini said.

By 2000, Wells Fargo decided to use more of a co-op approach.

“We took it in house, we then built the platform on our own, still subcontracting out a lot of the parts because we knew we couldnt do it all,” he said. “So, one of the things we learned was dont try to do it all, rely on experts who have already built something. Dont reinvent the wheel and youll be successful.”

Wells Fargo is now using its own model to go forward on two platforms: the broker-dealer platform with its own bank brokers and a trust platform with its private bank, which, Paolini says, is “what we believe to be a whole new distribution channel.”

The decision to distribute SMAs should be based on ease of entry, he said.

“Thats why we decided to start slowly,” Paolini said. “Walk before you run, thats the approach we took.”

Osborn described Prudentials role as a sponsor as “a cross of the two, which we call the hybrid type approach.”

Prudential felt it had to be empathetic and understand that each broker-dealer, whether it was an independent broker-dealer, a bank, insurance agency or a regional brokerage firm, wanted to be able to differentiate themselves but also to be able to leverage the cost and size of the platform Prudential could provide.

So, essentially, the broker-dealer would become the sponsor of the program with Prudential taking on much of the responsibility “underneath that and take basically a front-to-back approach to helping to drive the business as well,” Osborn said.

“In that model, in essence, the ultimate legal entity is the broker-dealer. Its called their program, it might by XYZ Managed Accounts, but in the end if youre a manager, youre getting the same systems you always had when you did business with Prudential.”

Reproduced from National Underwriter Life & Health/Financial Services Edition, May 26, 2003. Copyright 2003 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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