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MFS Enters Uncharted Waters With Managed Account Annuity


Managed accounts, a hot new area of financial services, are feared to be stealing money from mutual funds. In response, many fund companies have begun offering managed accounts, mostly through the Big Five wirehouses, in addition to their fund lineups. Now one annuity developer is seeking to leverage this product wave.

MFS Investment Management is in the preliminary development stages of an annuity based on managed accounts. The effort stems from the firm's attempt to innovate in more ways than simply coming up with new policy features and riders.

"The managed money side of the business is a very big part of the business, and we're looking for the possibility of a managed money type of annuity that would have appeal to the really wealthy investor," said Michael Mulkern, director of marketing for insurance products.

Out in Front in the Managed Account Race

MFS has stayed ahead of the curve on the managed account front, having gotten its system up and running early this year. Many competitors are just figuring out where the product fits in their complexes or are still in the development stages.

How exactly the product will work-and if it will ever fly-are still issues the product development team is wrestling with. Nonetheless, the concept is simple: "The most important feature of this is the cachet value--think of it as an upscale packaged annuity," said Charlie Rehor, director of product development for insurance products.

A quick look at the features provided by managed accounts raises some obvious questions about how a managed account annuity would differ at all from a standard variable annuity.

One of the primary benefits touted by managed account providers is tax efficiency; since securities are owned and managed directly, buy and sell decisions can be tailored for that client's tax situation and losses will not be incurred as the result of massive outflows, such as what happened recently to many mutual fund investors. Clearly, this benefit is totally negated within the confines of a VA.

Other Benefits

MFS will be looking to capitalize on managed accounts' "soft" benefit: cachet. High-account-minimum type accounts that are monitored individually by a portfolio manager have an intrinsic value that the proletarian mutual fund cannot offer. However, in the structure of a sub-account, how does a managed account-style portfolio differ from a mutual fund portfolio?

From a practical standpoint, not in an obvious way. Nevertheless, Rehor emphasized that product design in this case will focus on the concept of what managed accounts offer.

"A lot of the success of this will come from being able to keep paying the broker and offering the client a high-end appeal," said Rehor, adding, "A lot of it has to do with packaging."

Stand Alone

While many carriers jump to copy the latest hot rider, a managed account annuity may stand alone for some time.

"I don't believe others are developing similar products because, if you look at where it's coming from, we're an investment management firm. Most of our competitors are driven by insurance companies who hire investment managers," said Rehor. "This is going to be a distinct competitive advantage to us."

Indeed, Rehor may even be correct among competitors with in-house management. Lincoln Annuities, a subsidiary of Lincoln Financial (that also owns Philadelphia-based money manager Delaware Investments), has dismissed the development of a similar product.

"The reason we don't is it's very much a specialty item, a niche market," said Kelly Updike, spokeswoman for Lincoln Annuities. "We've found there's not a big market for it, so we've found it's not cost-justifiable for us to offer something like that."