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Franklin's Long SMA Ties Earn it Success


Separately managed accounts have become the hip product in the financial services industry in the past few years, with many traditional mutual fund firms now looking to penetrate the space. But one fund firm, Franklin Templeton, has been at it for years, and its deep distribution relationships and product breadth has enabled the company to garner $4.65 billion in assets. Money Management Executive Associate Editor Kevin Burke sat down with Franklin Templeton Private Client Group President and Chief Executive Officer Kent Strazza to talk about how his firm's experience in the field and strong fixed-income reputation enables Franklin to deliver a quality managed account product.

MME: Many mutual fund firms have come into the managed account space in the last few years. Your firm, however, has been there since 1979. Does that give you a tactical advantage?

Strazza: Being in this space for some time now does offer us an advantage. It all started with Templeton and Franklin getting into the managed account area concurrently but not really working that closely together. Franklin built its business in the domestic equity and fixed-income, true wrap environment, where we had several sponsors help us promote our products in the wrap space. Templeton, on the other hand, built its business more on the larger separate accounts by going after quasi-institutional accounts with international and global portfolios. And at that point they really only had one major sponsor and one corporate dealer they were working with.

The first thing we did was merge the sales and marketing forces. We've always kept the portfolio management intact and separate at Templeton. We've got quite a portfolio and analyst infrastructure. Although we have portfolio managers dedicated to the private client group, they work with the analysts and the portfolio managers throughout the firm. One of the benefits of being in the business so long is we've been able to develop quite a bit of product, from international and global all the way up the fixed income side. We're starting to combine products now.

So, it was more of a sales and marketing merger. Because we've been in the business for a while, one of the things that has helped us has been deep distribution and a dedicated sales force.

There was also an opportunity to integrate a lot of the operations - the account servicing, not so much the trading, but a lot of the back-office work. Once we merged these two entities, we were able to leverage the infrastructure from both organizations. It's a tough business, and the margins can be thin at times, but we've built ours into critical mass. Therefore, we're able to leverage up some of these resources and do some things on the distribution side.

MME: Would you say your background is more on the mutual fund side or the wrap account side?

Strazza: I came through the ranks at Franklin, starting in 1984 on the mutual fund side. While I've always had a role in sales and sales management, most recently, I ran the defined contribution bundled 401(k) business, which got me into some of the operational aspects of the business. In 2001, they asked me to come on board to merge Templeton Portfolio Advisor and Franklin into one distribution and marketing arm.

MME: Is the SMA space getting too crowded? Is there room for mutual funds to come in now and carve out a niche for themselves?

Strazza: I think the competition is good for the end client. I think there's going to be more products, more choices and hopefully better performance long term. If there are more managers and more sponsors speaking about managed accounts, I think it will also help the industry realize its potential for growth.

I have a lot of respect for the due diligence process at the major firms, the people who have to screen and approve managers and products. I greatly respect what they do, but I hope that it doesn't put too much pressure on them. I'm also a little concerned about new entrants getting into this space to try building better critical mass. Maybe they're willing to accept lower minimums or accept lower fees, which I would be concerned about long-term.

MME: What level of client are your products suited for?

Strazza: Generally speaking, we target the high-net-worth and the mid-size institutional-client - pension plans, endowments, foundations. We view the financial adviser as our customer. Templeton built a lot of their business around that end of the market. And we do a lot of small-cap business, where you get maybe 10% or 20% of an allocation from a high-net-worth client. We also do a lot of business on the muni side.

MME: How and where will you distribute your product?