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SMAs Just Reaching the Tip of the Iceberg

The separately managed account industry is just reaching the tip of the iceberg.

That is the battle cry heard from Len Reinhart, president of The Bank of New York's separate account services unit and a founding father of the wrap fee industry. He believes that the SMA business is where the mutual fund industry was in the mid-1980's and that with the help of technology and advertising dollars, the product will achieve extraordinary growth and become an increasingly popular investment vehicle for investors looking for customization and tax benefits in their portfolio.

Reinhart, a 25-year veteran of the financial services industry, is credited with developing programs that introduced institutional-level professional investment management services to the individual investor. He serves on the board of governors of the Money Management Institute and on the advisory board of directors of the Institute of Investment Management Consultants.

Reinhart founded the Lockwood family of companies in 1995 and helped launch its Electronic Managed Account Technologies, its Web-based platform for money managers and program sponsors. Lockwood merged with Bank of New York in 2002 to compete with the major wirehouses in the separate account space. For more on his conversation with Money Management Executive Associate Editor Kevin Burke, read on.

MME: When you first ventured into this business, what were your expectations?

Reinhart: I was like 23 years old, so I'm not sure I envisioned too much - other than a job. (Laughter.) But I entered on the analytical side of the institutional pension market at E. F. Hutton. Pension funds had to put prudent investment strategies and policies in place because there were a lot of abuses in the industry. We started working on the big institutional side and trained our brokers to work with smaller pension funds. From there it transitioned from the pension business to the high-net-worth business.

I saw it evolve from an institutional marketplace to slower growth to no growth as the 401(k) market came into being. From there, the responsibility of taking care of one's retirement shifted more and more to the individual. Eventually, it brought us to where we are today with no new corporation creating a pension plan. Traditional defined benefit pension plans are dinosaurs.

So, I've seen a complete transition of the business from an institutional mindset to an individual mindset. I'm not sure I envisioned any of that happening but rather adapted to it.

MME: Did the growth of the business exceed your expectations?

Reinhart: You know, it's funny. I look back on it, and it seemed like it was painful and sluggish. I remember back at E. F. Hutton when we had about $12 million in assets on the retail side. So the numerical growth has been astronomical and the amount of wealth created changed hands over the past 25 years.

Getting back to the separate account industry and what we're doing on the high-net-worth side, I've always felt it should have gotten there quicker, meaning, that SMAs had all the attributes of mutual funds but were better because they could be customized. Yet, technology really didn't allow for that until the last seven or eight years.

So it really didn't get its due as we went along until recent years. I still think now we've just reached the tip of the iceberg with SMAs. I think we're at where Vanguard and Fidelity were in the early 80s in terms of their popularity. Those weren't household names, and all of a sudden the press got behind them and clients started to understand them. A major education process got underway and they took off dramatically.

I think we're at the beginning of that cycle in the SMA industry. I think you're going to see tremendous growth over the next decade as the education and advertising campaigns kick into gear and people realize their true features.

MME: You founded Lockwood in 1995, but after seven years you merged with Bank of New York? What led to that partnership?

Reinhart: It was really an effort on our part. We had taken Lockwood as far as we could take it as an independent, legally. And by that I mean we've grown from nothing to over $9 billion in assets. So we've sort of blown through the boutique players out there, and all of a sudden we were competing with the Schwabs and Fidelitys of the world, and we didn't have the resources to do that alone. We couldn't organically grow it anymore and compete with those people.

In the beginning, they probably took a look at us and said we don't have to worry about them, but then we started to get business. Suddenly, somebody gave me one of their business plans and it identified us as one of their major competitors.