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June 22, 2005 at 08:00 PM
As a warm-up to its Morningstar Investment Conference in Chicago June 20-22, the company hosted (in person in Chicago and through conference calls) the Morningstar Insight Forum on June 20, during which experts discussed a number of investment topics including exchange traded funds, separate accounts, and hedge funds.
Of particular interest was a session about separate accounts led by Steve Deutsch, director of separate accounts at Morningstar. Deutsch wondered, “Have we reached ‘The Tipping Point’ for separate accounts?” referring to the best-selling book The Tipping Point: How Little Things Can Make a Big Difference, by Malcolm Gladwell.
Separately managed accounts (SMAs) have been called at different times and in different places asset-based fee accounts, wrap accounts, privately managed accounts, and individually managed accounts. Now they may be marketed under a new moniker, the unified managed account (UMA). All this confusion over names and no real agreement on performance presentation may be part of the reason why these accounts are not as popular as they were projected to be even with the march toward a fee-based approach to asset management. According to Morningstar, only about 20% of advisors offer SMAs. Of the approximately $576 billion invested in retail SMAs, Deutsch says 80% of the assets are held by Merrill Lynch, Smith Barney, UBS, Prudential, and Morgan Stanley. These are retail accounts of under $1 million; the average account size is $283,000, and they carry a charge of 28-53 basis points.
Why is there a feeling of unrealized promise with SMAs? Apparently some of the greatest selling points are underutilized: customization and tax efficiency. Deutsch says only 25% of SMAs are customized, and pointed to a Cerulli Associates study that found that only 30% of taxable accounts get any special tax treatment.
