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Managed Accounts, Mutual Funds Can Coexist

Are mutual fund firms that develop managed account products competing with themselves? Yes and no, according to industry executives.

While offering managed account products will likely encroach upon some assets that would have gone to a firm's mutual funds, it also provides valuable new leads for new investors and sales representatives.

"I can't quantify it, but what I would say is that managed accounts are additive," said Gordon Forrester, director of marketing for Putnam Retail Management of Boston. "What we're finding is that when we're doing SMA (separately managed account) business with consultants, that they're starting to do more mutual fund business as well."

Offering managed accounts can lead to mutual fund sales because it exposes fund companies to reps who were never interested in mutual funds exclusively, said Paul Fullerton, an analyst with Cerulli Associates of Boston, which does research and consulting for both mutual funds and managed accounts.

It is a bit early to do any hard analysis on that notion, Fullerton said, because the major fund houses that have developed managed accounts have only begun offering them recently. However, early signs have been positive, he said.

Opening Doors

"We have seen early signs that by getting separate account consultant business, it's opening doors to [fund companies] that before were closed," Fullerton said. "They're getting in touch with higher-end reps who are doing business with higher-end clients. There's an opportunity to build new relationships out of the separate account business."

That was the case for MFS Investment Management of Boston, which began offering managed accounts in February of 2001. Having managed account products will definitely take away assets from mutual funds, but it's important to look at what business they bring in as well, said Robert Leo, vice chairman of MFS.

In 2001, 500 reps who had never been customers of MFS in the past in any way did SMA business with the firm. Of those, 200 also did mutual fund business at some point after dealing with the firm's managed accounts, Leo said.

"So we got to the corner office rep, who wouldn't talk to us before," Leo said. "He gets a $50,000 ticket [and says], Oh yeah, MFS. I'll throw it their way.' We saw a lot of that. We're talking hundreds of millions of dollars coming in from people who never did business with us before."

Dual Accounts

What surprised Leo even more was how existing clients holding mutual funds added to those accounts after opening managed accounts. There were 900 reps who had bought funds from MFS in the past who opened managed accounts in 2001. They actually accounted for 10% more mutual fund sales in 2001 than in 2000, according to Leo.

Even though "2001 was a lousy year for mutual funds, and across the board," Leo said, and MFS' fund sales were down roughly 15%, these reps increased their purchases of MFS mutual funds by 10%.

"That group liked the brand [and] they got more comfortable with us," Leo said. "Clearly, managed accounts cause a cannibalization of mutual funds to some degree, but I think how you deal with it can give you some interesting results."


Davis Advisors of New York, which recently got into the managed account business, is expecting a lot of cannibalization of mutual funds, but not until 2005, said Russell Wiese, chief marketing officer at Davis. Between 2005 and 2010, Davis Advisors expects a large number of its retiring clients will begin rolling over assets from their 401(k)s and IRAs into managed accounts, Wiese said.

"We see rollovers as being the next huge cash flow for retail brokerages, and a lot of those assets will likely head that way," Fullerton said. Investors who are retiring with a big nest egg will be looking for more holistic financial planning, he said.

"Managed accounts are set up nicely for that. We think managed accounts will be a huge catcher's mitt for those assets. They're not all going to go there, but a large majority probably will," he said.