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Money Managers Emphasize SMA Process


NEW YORK - "Separately managed accounts are about a process, not a product," reminded Jack Sharry, president of the private client group of Phoenix Investment Partners of Hartford, Conn., speaking at a media conference held here earlier this month. The event, which detailed how the separately managed accounts consulting process works, was sponsored by the Money Management Institute, the national organization of the managed account industry, headquartered in Washington.

"Too often, too much emphasis is on the product and features," cautioned Mark Pennington, partner and director of advisory services at Lord Abbett of Jersey City, N.J., which has $14 billion among its 54,000 separately managed accounts. "What's rooted in the separate account business is working with an adviser," he added.

What's more, no client will exclusively use separately managed accounts, speakers said. They will typically use numerous investment vehicles including mutual funds, individual securities and hedge funds. Unlike other investments, separately managed accounts are customizable to accommodate individual clients' needs and circumstances, such as where a client wants to realize a tax loss to offset gains realized outside of their managed account.

The change in market sentiment is driving growth in the managed account market, speakers said. Three years ago, individual investors, driven by emotion, were investing on their own or urging their advisers to put them into Internet or hot technology stocks. Now, bear market-prompted fear is clearly driving the market, Pennington said.

That fear has motivated an increasing number of affluent individuals to seek guidance from advisers, and many are adding managed accounts as part of their overall financial portfolio, speakers said. The typical managed account client at Merrill Lynch is age 62, has been with their adviser for an average of nine years, has $1.5 million in investable assets and has at least three portfolios, Sharry said. "At a certain point, once they [affluent investors] get beyond mutual funds and securities, they start to look for another way to manage their assets," Sharry added. At the same time, more and more advisers are transforming their businesses from transaction-based to advice-based.

Although assets held within separately managed accounts dropped off to $383 billion in the first quarter of 2003 from a high of $417 billion in 1996, the industry is still poised for growth. Financial Research Corp. of Boston estimates that managed account assets will climb to $930 billion by 2006, and $2.1 trillion by 2011. Furthermore, the sheer number of separately managed accounts is expected to grow to 5.3 million by 2006 and 12.5 million by 2011.

The separately managed account industry is an outgrowth of the institutional money management arena and largely mimics how public pension plans, foundations and endowments are managed, the speakers said..

As such, gone are the days of the flimsy, superficial client applications often written by protective compliance officers more interested in covering the firm's assets than the clients', said Len Reinhart, president of The Bank of New York's separate account services. Reinhart sold his firm, Lockwood Financial, to the Bank of New York nine months ago. Today, separately managed account clients are completing lengthy, in-depth, holistic, multi-page applications, all to help advisers create a balance sheet for the client, Reinhart said.

"It was hard to get people to fill out this questionnaire in a bull market," Reinhart said. "The cry was, Just get me in now.'" But the current grizzly bear market has actually helped that consulting process by allowing advisers to take a step back and create an overall strategy of helping clients attain goals, as opposed to just adding on strategies, he said.

"It's a constant process of managing expectations and setting strategies to meet goals," Reinhart noted. The hardest part is getting investors to stick to a well-thought-out investment plan, executives said.

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