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Full-Service Needed For Wealthy

Fund companies competing for the high-net-worth investor need to be wary of the challenges and potential pitfalls of offering alternative products if they hope to gain a foothold in that market, according to industry executives.

More than just providing products to cater to that market segment, funds need to change how they operate and market themselves in order to be successful, executives said.

One of the primary vehicles used to court high-net-worth investors is managed accounts, according to Financial Research Corp. Assets held in managed accounts have grown 26% annually since 1996, reaching to $417 billion in 2000, according to FRC.

Because managed accounts can be customized to fit individual investors' needs while offering professional management and tax advantages, they have been a popular option for the high-net-worth investor, according to FRC.

Consultative Approach Key

Tapping the high-net-worth market is not as simple as adding managed accounts, however. In order to successfully offer managed accounts, fund companies need to make a fundamental change in how they sell the product, according to Chris Davis, executive director of the Money Management Institute of Washington, D.C. "It's not a product, it's a process," he said. "That's probably the single most compelling hurdle that the fund industry will have to overcome. For a long, long time the fund industry has marketed investment products-and managed accounts are the opposite of products. They are the platform upon which the investment consulting relationship is delivered to the client."

Embracing the consultative sales approach will prove to be a huge challenge for the fund industry, said Davis. "Some of those wholesalers in the fund industry will never get it. They don't understand the difference between the consulting relationship and the product slam down."

Still, a study issued last week by Cerulli Associates of Boston predicts a growing number of fund companies are likely to begin offering non-traditional investment products like separately managed accounts, hedge funds and exchange and donor funds as a way of attracting high-net-worth investors.

Market Growth Driving Competition

Funds' efforts at adding these types of products are driven by an increasing number of investors that have accumulated between $500,000 and $50 million in assets. By the end of 1999, approximately 2.5 million households had accumulated between $1 million and $5 million in liquid assets, 200,000 between $5 million and $10 million and approximately 100,000 had over $10 million, according to Cerulli's study.

And the growth of high-net-worth assets in North America is expected to continue at about 8.1 % annually until 2004, according to Shealyn McGuire, a Cerulli consultant."I think that the high-net-worth client is looking for that customization and tailored approach and certainly the tax-efficiency of a separately-managed account," she said.

In order to better compete for high-net-worth assets, an increasing number of fund companies are likely to seek trust charters. "The problem really lies in the operations and the due diligence," McGuire said. "What I see happening is that when the fund families are building these trust companies themselves instead of acquiring outside experience and talent, they are not fully aware of the issues that the courts have already deemed important."

Lack of Trust

Several large financial institutions have been sued in the past for breech of fiduciary responsibility and improper asset allocation in the maintenance of trusts, she said. "It's the new entrants to the trust business that really need to have an experience level that is more than just the six-month course that they took on estate planning," McGuire said.

Fund companies will have to change their image and market themselves as investment managers, not just product providers, she said. "High-net-worth investors are not buying mutual funds," she said. "They may come to the investment manager with a portfolio of mutual funds, but then the investment manager is going to wean them off of mutual funds and get them into tax strategies and separately managed accounts and they will also get them into a more customized approach."

Changing that image may force some firms to revamp their marketing, she said. "Just like MFS has done. They are no longer using the tagline, The World's First Mutual Fund'. They are positioning themselves as an investment manager," she said.