Separately managed accounts (SMAs) are growing fast at Charles Schwab as fee-based advisors seek to outsource money management for clients and concentrate on other aspects of wealth management, such as tax or estate planning.
Why are SMA assets growing so fast? “It’s darned hard to pick stocks,” says John Morris, senior vice president of asset management products and services at Charles Schwab, in San Francisco. “I think it’s starting to resonate with people: outsourcing makes sense–do you really want to compete with the pros?” There is a lot of money in play, he says, because people are selling businesses, homes, and wealth is being transferred from parents to their children. Schwab’s advisors and their SMA clients like the fact that they can customize accounts for clients by restricting certain industries or individual companies, and harvest losses to offset gains to better-manage taxes; Morris says 30% to 40% of Schwab’s customers in SMAs use the tax-management feature.
Schwab has $30 billion in SMA assets; of that, $23 billion is through fee-based advisors, and the other $7 billion is via Schwab’s retail financial consultants. That’s considerable when you realize that Schwab only started allowing its in-house investment consultants to have real relationships with retail customers last year; before that, Schwab’s representatives were only allowed to take orders from customers. The SMA business at Schwab grew at 34% in 2005, while the industry average was 15%, according to Morris, who says it’s the fastest-growing business at Schwab. That looks likely to continue because at this point only 15% of Schwab’s advisors are using SMAs for clients, leaving tremendous potential for that business to grow as SMAs grow more widely used. Because minimum investments for SMAs typically are high, in the $500,000 or $1 million range, advisors use them for wealthier clients rather than the average investor, and it is advisors who are driving the SMA-market, not retail do-it-yourself investors.