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Top-Five Wirehouse Distribution Key To Early Managed Account Growth

For fund companies breaking into the managed account marketplace, there is one crucial question: Can you get your products on the platforms of the major wirehouses? Big wirehouses control more than 70% of managed account assets, according to Cerulli Associates, a Boston-based consulting firm. While other channels may be growing, it's the wirehouses that can make or break a company's entry into the business, according to industry executives.

MFS Investment Management first introduced its managed account product in May 2001, and the firm has already experienced substantial growth. In March, MFS had approximately $2 billion in managed account assets, and, unlike some other firms, built its program from the ground-up, as opposed to acquiring existing firms, according to John Reilly, a spokesman for the Boston-based firm. Companies typically have to have at least $500 million in assets to break even in the managed account market, according to Financial Research Corp. of Boston, although break-even points differ from firm to firm.

"Over the past year, we've gotten aligned with all of the five major wirehouse firms," said Reilly. "That's been absolutely huge for us."

The top five firms are Merrill Lynch, Salomon Smith Barney, UBS Paine Webber, Morgan Stanley and Prudential.

MFS was able to take advantage of the fact that it already had mutual fund distribution relationships with the wirehouses, Reilly said. Still, the firm had to demonstrate that it was competent in the managed account segment of the business, Reilly said.

"They knew us and having that relationship was really important, but we had to prove our capabilities," he said.

AIM Private Asset Management (APAM) has also been trying to leverage its fund company's relationship with the top wirehouses. AIM launched APAM in October of 2000. In mid-March, the firm managed $474 million in managed account assets, just under FRC's break-even point.

APAM has had more difficulty than MFS in getting the wirehouses to carry its managed account line. Although those products are available through nine programs, they are only on two of the top five wirehouses--PaineWebber and Merrill Lynch, which the firm finally aligned with in November 2001. When the firm announced that it had partnered with Merrill Lynch, it stressed that it was an extension of a relationship that was already 15 years old.

"AIM has enjoyed a long-standing relationship with Merrill Lynch and we are pleased to be extending our partnership into this new and growing segment of our business," said Gary Crum, president of Houston-based AIM Capital Management, in November.

While the firm has seen a rise in daily managed account flows recently and is pleased with the amount of assets it has brought in thus far, it is doing everything it can to find additional distributors, said Kamala Sachidanandan, director of marketing for APAM.

"We have seen an up-tick, but it has taken a while for the ball to get rolling," Sachidanandan said. "We're trying to leverage our relationship with the major wirehouses. We're spending a lot of time with the programs we're not currently on."

The top wirehouses have a very specific due diligence process, and getting onto a program can take anywhere from sixmonths to two years, Sachidanandan said. The process usually begins with a request for proposal (RFP). Once the RFP is submitted, the wirehouses research every aspect of the money manager's operational structure and investment management expertise, Sachidanandan said. Before they agree to align, wirehouses need to talk to the firm's investment managers and company executives, in some cases, multiple times.

"It has been helpful that we already had relationships with the wirehouses because we knew who to get in touch with and it made getting to the right people faster, but I don't think that the due diligence process has been any easier because of that per se," Sachidanandan said. "The due diligence is very tough. I don't think any slack was cut."

While it is critical for a fund company (or any other money manager) to be distributed through the major wirehouses, just being aligned with them is not sufficient, said Paul Fullerton, an analyst with Cerulli. Firms still have to provide customized service and top investment management in order to attract, and then keep managed account assets, he said.

"The wirehouses do not guarantee assets," Fullerton said.

"These firms have been able to springboard off of great relationships they already had, but retention is really crucial. In general, managed account assets are not as profitable as mutual fund assets, but they can be if you can get the assets to stick."

Now that MFS has a handle on the wirehouse distribution channel, it is looking to expand to the other channels, particularly through banks and independent financial planning firms where MFS foresees good incremental growth, Reilly said. AIM is also looking to get some exposure to the financial planning firms over the long-term, but is primarily focused on wirehouse distribution.

"We're trying to leverage relationships with other distribution channels, too, but we think the whole shift from mutual funds to separately managed accounts will occur through the brokerage companies," Sachidanandan said.

Although wirehouses are clearly dominant with respect to managed account distribution right now, Cerulli anticipates significant growth in other areas.

"You clearly can't discount the wirehouses because of their sheer volume-12,000 to 15,000 brokers per firm- but we think the wirehouse share is a high watermark," Fullerton said. "More and more people are getting into the business, and there will be a percentage growth in other areas."