Separately managed accounts may become the investment of choice for baby boomers who have significant assets and a desire for professional management and advice, say experts in the field.
SMAs are professionally managed portfolios of individual securities that can be tailored to client needs for accumulation and distribution.
According to The Money Management Institute, Washington, SMA assets under management rose 17.7% in 2005 (to $678.1 billion) over the same year-earlier period, and SMA accounts rose 12% (to an estimated 2.17 million) in the same period.
The products have several features of strong interest to boomers, contends Kathleen Pritchard, vice president-marketing at Legg Mason Investor Services LLC, Stamford, Conn. These include access to portfolio managers and their thinking, visibility of investments, tax-efficient management of investments, various communications benefits, and, particularly, conduciveness to an advice-oriented client-advisor relationship.
It is well documented that “boomers want advice and are willing to pay for it,” Pritchard points out. The SMA meets that need because it is advisor-sold, in a consultative, needs-based manner, she says. Also, boomer clients “can participate in the SMA’s investment decisions to the degree they want,” with the advisor’s advice and support, she says.
SMAs are not insurance products, so many insurance specialists may be only vaguely aware of them. The lead distributors are wirehouses and independent planners, reports Brian Perlman, vice president of Mathew Greenwald & Associates, a Washington, D.C., research firm.
But insurance reps and other advisors definitely should be considering SMA opportunities, maintains David Levi, managing director and head of marketing for Legg Mason, an SMA market leader. “The advisors who do use SMAs like them, and we’ve found they will do more and more SMA business” as their familiarity with the product grows.
Anthony Pace, vice president-investment management division a Lindbergh & Ripple, a Windsor, Conn., insurance and financial services firm, supports that. His firm regularly uses the SMA in full financial planning. It facilitates asset allocation, with different SMA portfolios representing different asset classes. This is “critical” for high-net-worth clients, he contends.
“The products have been around for over 10 years,” he says, “but surprisingly, many people don’t yet know about them.”
SMAs have seen enormous growth in recent years, Levi points out, but the penetration is not like that of mutual funds. To learn why, Legg Mason did an SMA survey in 2005 of 400 advisors and 505 investors. Conducted by Mathew Greenwald & Associates, it found that “a lot of people who don’t sell SMAs are not knowledgeable about them,” says Levi. Also, it found advisors don’t always perceive the benefits that customers value in the SMA product.
Also, some advisors stay away from SMAs because they believe the products are a) only for the affluent or b) are too complex, Levi says.
Those are misconceptions the industry is trying to change. SMAs are “an opportunity for all of us,” contends Levi. For instance, Legg Mason now allows minimum investments as low as $50,000, and many other firms have a $100,000 minimum. That’s far below the $1-plus million minimum that was common a decade ago.
(Note: Despite the new lower minimums, Pace, the Connecticut advisor, still prefers using SMAs for clients with $2 million to $5 million in investable assets. “At this level, the fees are not a problem,” he says, and allocation between many asset classes is possible, not just allocation between a few classes.)
Furthermore, once people become familiar with SMAs, the products don’t seem as complicated as, say, hedge funds or variable annuities, Levi says.
For baby boomers, the SMA easily can fit into a 401(k) rollover IRA, as one of the investment options, points out Pritchard.
The tax-harvesting advantage of SMAs would not come into play inside an IRA, she allows, because IRAs already provide tax deferral. (Tax harvesting refers to buying and selling the SMA’s securities in the most tax-advantageous way for the client.) But Pritchard says the SMA’s other advantages–including its advice-orientation–still make SMAs a viable option for boomers, whether inside an IRA or out.
The 2005 Legg Mason survey, which included boomers but did not focus on them, found SMA investors are primarily interested in the product’s communications benefits, Pritchard says.