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Managed Accounts Require Expensive Sales Support

NEW YORK - A mutual fund company looking to break into the managed account arena might expect to be able to use the firm's existing sales staff to push the new products. But fund executives report that relying solely on the average mutual fund wholesaling team is not the right strategy.

Instead, training and expanding sales staffs is necessary to meet the demands of managed account clients. And that often means incurring significant costs which can only be supported by large pools of assets, executives report.

"This is a very expensive business to get into," said Robert Leo, vice chairman at MFS Investment Management of Boston. "All firms have different levels where they have to be to run profitably. For MFS, it's billions and billions [of dollars]. Frankly, if we can be profitable by the end of the year, we'll feel pretty good about it."

Leo and other fund executives spoke about how mutual fund companies can get into the managed account business here last week at the Money Management Institute's 2002 Annual Conference. The MMI is the Washington, D.C.-based organization for managed accounts.

In fact, when MFS first decided to get into the managed accounts business in 2000, the firm studied the relevant financials, decided it had to raise a certain amount of assets to be profitable, and projected it could achieve that in a year and a half, Leo said.

However, the firm has since found that it needs double the assets and does not expect to be profitable until the end of its second year or into its third year of operation, Leo said. As of March, MFS had approximately $2 billion in managed account assets.

The reason why traditional mutual fund wholesaling staffs are, by themselves, inadequate is because managed account clients require a significantly higher degree of information about the makeup and strategy of the portfolios, said Russell Wiese, chief marketing officer at Boston-based Davis Advisors. Davis has 14 external wholesalers who cover the whole country.

After the firm developed managed accounts, it had to add "quasi-research salespeople" to support the 14 external wholesalers, Wiese said. These executives sit in on all of the firm's research meetings and are acutely aware of what is going on inside the firm's portfolios, such as why the manager is holding a certain position.

Davis also added another three people to constantly train the firm's sales force. For managed accounts, much more so than for other types of investment products, salespeople have to be ready to answer in-depth questions that retail product customers are generally not concerned with, Wiese said.

"You can really embarrass yourself if you don't put people out there who really know what's happening inside the portfolios," he said.

In addition, in order to deal with the additional information managed account clients often seek, and to shift that burden off its portfolio managers, MFS has hired associate portfolio managers to serve as a buffer between the reps and senior portfolio management, Leo said.

MFS also now requires all of its staff to acquire chartered investment management certifications (CIMC), which has been a substantial undertaking financially for the firm and burdensome for the employees, he said.

"Managed account clients require in-depth portfolio analysis," Leo said. "They want to know about a portfolio's individual positions."

Putnam Investments of Boston has been able to use its institutional portfolio managers who are already explaining the nuances of their portfolio to institutional consultants, to do the same for managed account clients, said Gordon Forrester, director of marketing for Putnam Retail Management.

The firm has dedicated a tremendous amount of resources to Putnam Private Asset Management, its managed accounts unit, and there is no set timeline for when profitability must be reached, he said.