Separate Accounts Steal Funds' Thunder
September 25, 2000
DENVER - Hundreds of fund executives converged here for Schwab's IMPACT 2000 conference, laden with sales brochures and every imaginable trinket and each intent on expanding his network of financial advisors. Despite their appeal though, the funds' performance-touting brochures and plastic baubles could not wrest advisors' attentions away from separately-managed accounts.
Increasingly, financial advisors are passing up mutual funds for products they can customize for their clients, like separate accounts, said Paige Johnson Roth, president of Pine Haven Investment Counsel of Portland, Ore., a financial advisory firm.
"I think it's a way to differentiate yourself from other advisors," she said. A good percentage of her clients are high-net-worth investors who want greater control over taxes on their investments, she said.
The high-net-worth market and the increased demands it has for customized investment products that offer diversity and effective tax management makes separate accounts a great investment product to market to that group, she said.
Not surprisingly, more and more financial advisors are warming up to the products. To date, Schwab Institutional has 500 advisors with $5.7 billion in assets invested with separate account managers, a 300 percent increase over the beginning of 1999, when that figure was only $1.4 billion.
Industry-wide, Schwab predicts assets in separately-managed accounts will double in the next five years, growing from last year's $241.4 billion in assets to $579.9 billion by 2004.
Separately-managed accounts, however, will not cause the demise of the fund industry and mutual funds are still the best product for a wide range of clients, including high-net- worth investors, said Morty Schaja, president and CEO of Baron Capital Management of New York. Mutual funds offer several fundamental advantages over separate accounts, he said. It is easier, for instance, to redeem a mutual fund than it is a separate account and for all of the customization and personalized attention separate accounts claim to offer, mutual funds still get more attention from fund managers because of their size.
"You better believe a manager is going to spend more time on a billion dollar account than a million-dollar separate account," Schaja said. Also, because mutual funds have larger pools of capital, they can take more positions and offer greater diversification than separate accounts can, he said.
However, separate accounts offer investment advisors a chance to play an integral role in their clients' investments, said Richard D. Hughes, president of Rittenhouse Financial Services of Chicago. The sales process involved in selling separate accounts allows advisors to offer clients a service in matching their goals with an appropriate money manager, he said. And because a separate account is tailored to each investor's needs, the advisor plays an ongoing role between the client and the money manager, he said.
In offering a customized product, advisors can give their clients a product that fosters an ongoing relationship, he said.
"It's clear from our perspective that mutual funds have been positioned as a product and the managed account is sold as a process," he said. "Mutual funds are products and are sold as commodities. Managed accounts are sold as process that is value added."