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Operations Execs Focus on Separate Accounts


SCOTTSDALE, Ariz. - Anti-money laundering, the high standards of the rich, further automation and advancing the power of the Internet were some of the top-line issues at the Investment Company Institute's Operations Conference here.

As the meeting opened last Monday, in a conference hall with only about one-third of the seats filled, a panel of four discussed attracting and serving the affluent investor, including ideal sales force configurations.

Paul Fullerton, an analyst with Boston-based Cerulli Associates, said that in the managed accounts area, fund companies and their operations teams should concentrate on four perspectives. With so many investors seeking guidance and advice, now is an ideal time to launch managed accounts and fee-based type programs.

"Advisers can no longer build their books of business on transactions. So, they are moving more toward a relationship with their clients," which leads to "recurring revenue," Fullerton said.

The third perspective, Fullerton said, is to remember the importance of these steady, recurring revenue streams to the home office.

Finally, from the asset manager's point of view, other financial institutions are beginning to encroach on mutual fund companies' space, he said.

"Separate accounts are definitely in the spotlight," Fullerton said. "All the brokerage firms we talk to are ramping up their efforts to gather more and more separate accounts assets to align with the affluent, higher-end investor. That's where everyone is trying to grab share right now.

"If you look at it on a cash-flow basis it's very strong and very powerful, [even though this market is only] about 10% the size of the long-term mutual fund industry," Fullerton said. Right now, the affluent market is attracting "a third of the flows. So this is pretty powerful stuff."

Even among institutional investors, sales, revenue and assets under management are moving towards a fee-based type business.

The Cerulli executive noted that since half the households in the United States already own mutual funds, the industry, even brokerage firms, is looking to find new "core markets."

"And right now, separate accounts are a very attractive, addressable market," Fullerton said.

Still, there are problems with the moneyed market, besides its relatively small size, Fullerton warned. "We don't see the profit margins in this space as we do in traditional retail mutual funds, or even institutional" business, Fullerton continued. "It takes about 3-1/2 years to get to break even if you're starting from green field. It's a pretty tough market."

One of the problems right out of the gate in reaching the affluent is that there are no common protocols in the industry. "Every platform that an asset manager or brokerage participates in has a different set of [criteria for] opening an account and trade-order systems," leading to tremendous inefficiencies, Fullerton said.

One emerging solution is outsourcing the seven functions, which Fullerton identified as being vital to separate accounts. These are: opening and closing an account, executing a trade, marketing fulfillment, reconciliation, general account administration and performance reporting. Outside vendors have not proven very capable in the areas of portfolio administration and trading, however, according to Fullerton. "The portfolio administrator tends to do all the wizardry in this stuff," he said.

As for distribution dynamics, the wirehouses own about 72% of the business, he said.