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Separately Managed Accounts Appeal To Well-Off Boomers

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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.

For instance, 50% of SMA owners said access to the portfolio manager is extremely important in making purchase decisions, and nearly 70% cited the ability to meet/speak with the portfolio manager as a very important feature. In addition, more than 60% said visibility of fees, better communications and performance reporting, and visibility of holdings are very important.

Levi views these findings as an indication that SMAs encourage stronger client relationships, because the inherent communications foster greater client-advisor involvement.

Most managers do not speak directly with clients, but Levi knows of one manager who will speak with a client if the advisor is also present. In addition, the products provide website access to information about what the manager is doing and a phone hotline, too, he says. Legg Mason supports the communications aspect, too, by providing advisors with tools that help answer client questions about the portfolio manager’s actions and decisions.

The SMA is really about a three-way relationship, between client, advisor and portfolio manager, Levi concludes. Through this relationship, the parties build trust over the long term, he says.

For advisors who come into SMAs from an insurance background, that should be comfortable territory, suggests Perlman, the researcher. Insurance advisors are skilled in needs-based selling and meeting client goals and objectives, he says. Since such skills are what boomers and other investors value in the SMA, he believes more insurance advisors should be selling SMAs.

Pace, the advisor, recalls that there was a time when only the big national wirehouses could provide the support services that SMAs require. But now, SMA platforms (firms) exist that have the same tools as those wirehouses, he says. This is making it possible for other advisors to get into the market.

Because he favors using SMAs only for high-net-worth clients, Pace does not expect to see many insurance agents enter this market soon. “The typical agent does not deal with high-net-worth people,” he explains.

But those agents who do have wealthy clients “have got to have SMAs in order to compete effectively,” he maintains. “If a client has, say, $20 million, you’re not going to use mutual funds,” Pace says. “At least show the SMAs, that you have them.”

But Pace also cautions against using SMAs in every situation. In some cases, the fees can be too high, he explains. Also, if the client wants to invest $200,000 to $500,000, using SMAs might not provide enough diversification for the allocation to be effective, he says. “That would be terrible; the client would not get the best fee or the best of breed in asset classes.”

Pace says there can be “very little transparency,” too, between the published SMA returns and the clients’ own returns. “Each manager is different and doing different things,” so it happens, he says.

In addition, the advisor’s job is to coordinate the managers, Pace says. “You have to tell them what to sell, for instance.”

Some insurance specialists may see the SMA as a competitive threat, Perlman allows. He thinks they should instead view it as an opportunity.

In today’s financial environment, he explains, SMAs are fostering creation of a “relationship practice.” It’s comparable to the consultative approach that most life insurance agents used before life insurance became as commoditized as it is today, Perlman contends. Now, agents can apply their traditional skills to the new SMAs.

SMAs give advisors more opportunity to manage money, Perlman adds. They also give clients more opportunity (and reason) to talk to the advisor and investment manager–which Perlman says boomers want to do. That leads to more needs-based selling, more talking about goals and objectives, and less focus on performance, he says.

Levi says the Legg Mason survey found that not all advisors are yet aware of the consumer’s need for communication.

Instead, 50% of the advisors identified “historical manager performance” as an extremely important benefit, and 48% said “operational support” is extremely important. And, while 69% of SMA owners said “manager access” is very important, only 48% of advisors said the same.

Such disconnects could get in the way of advisors meeting client needs with SMAs, Levi suggests. His advice to advisors: Address what is important to SMA clients and explain the perceived benefits of SMAs from the client’s perspective.


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