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Wealth Products Gain, Despite Cost Cutting

Although the bear market has prompted many funds to cut costs, wealth management products and services have been largely unaffected by fund companies' austerity measures, according to industry executive and analysts.

In fact, several fund companies have announced plans to develop and market new high-net-worth products and services despite market conditions. Van Kampen of Chicago last week became the most recent company to announce that it will develop a managed account business to target high-net-worth investors. The company began offering a technology portfolio in February and will add two value-oriented portfolios later this year, according to a company spokesperson.

Van Kampen joins a growing list of fund companies that have recently added separately-managed accounts and customizable portfolio products in order to attract high-net-worth investors, said Ryan Tagal, an analyst with Cerulli Associates of Boston.

Last year, assets held in managed accounts grew 17 percent to $289 billion from the previous year, according to Cerulli Associates. Conversely, the fund industry shrank 2.3 percent last year in terms of assets.

Much of managed accounts' growth simply is the result of a growing number of retail fund groups entering the business, said Tagal.

"A lot more retail-oriented companies are looking at this," he said. "They feel they can lock in customers with these type of products." Retail firms like Fidelity Investments, MFS and Putnam, all of Boston, are catering to the high-net-worth market with managed account products, he said.

The drive to develop high-net-worth products and services comes at a time when many fund groups are searching for ways to improve earnings through budget cuts and cutbacks in staff. In fact, earlier this month, Putnam laid off 258 employees, a four percent reduction of its staff.

The race to market to high-net-worth investors has kept many fund companies from cutting or scaling back their efforts at developing and marketing wealth products, said Mark McMeans, president and director of AIM Private Asset Management, the private asset management division of AIM Funds of Houston.

Fund companies want to capture the growing number of fund shareholders who have amassed a significant amount of assets and are looking for a product that offers a higher degree of customization than a simple fund, he said. Rather than allow these shareholders to take their assets elsewhere, many fund companies are starting to develop their own wealth products, he said.

That was AIM's strategy when it began offering eight different customized portfolios with a minimum investment requirement of $100,000 last October, McMeans said. The product is distributed through company wholesalers, Paine Webber of New York and First Union Securities of Charlotte, N.C., McMeans said. AIM Private Asset Management will add several wholesalers in the coming months, McMeans said.

By March 31, AIM's customized portfolios had attracted $45 million in assets, McMeans said. While the portfolios have not attracted assets as quickly as funds have, the company's support of the product has not waivered, he said.

"It's been interesting to be involved in a new division in one of the worst bear markets," he said. "It hasn't affected our strategy at all."

AIM management's loyalty to the product is solid because it answers investment advisors' demands for product that can be customized for their clients and because technology is lowering necessary investment minimums on the product, making it a suitable investment option for a growing number of investors, McMeans said.

Turner Investment Partners of Berywn, Pa., is another firm that has dedicated significant resources to developing managed accounts and a wrap program in an effort to attract high-net-worth clients, said Stephen Kneeley, president and CEO of the company.

Like most other fund companies, Turner's assets have declined in the first quarter, dropping from $10.1 billion at the end of 2000 to $8.3 billion as of March 31. Despite reduced revenues, Turner is investing between $3.5 million and $5 million in the new product because of the projected growth of the high-net-worth market, said Kneeley.

Within the next 18 to 24 months, approximately 25 percent of the company's assets will come from the new product, Kneeley said. Turner had only $3 million in assets in the program as of April 12, he said.

Funds' dedication to developing wealth products in the face of one of the worst markets in over 20 years is not surprising for a number of reasons, said Christopher L. Davis, executive director of Money Management Institute of Washington D.C.

The move to develop separately-managed accounts and customized portfolios reveals the strength of investment advisors as a distribution channel, he said. The product can be managed to meet individual clients' tax and asset allocation needs with the advisor playing a central role, he said.

Because advisors play a significant role in a client's choice of managed account products, client turnover in the products is reduced, a quality that many fund companies find attractive about the products, he said.

By launching managed accounts, fund companies improve their odds of capturing a percentage of the $11 trillion in assets that baby boomers will receive from wealth transfer in the next 10 to 15 years, Davis said.

Fund companies currently offering managed accounts may actually benefit from turbulent markets, Davis said.