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SMAs Likely to Skirt Scandal

Separately managed account pioneer Frank Campanale doesn't see any outstanding areas where regulators might swoop in and shake up the industry's foundation like in the mutual fund arena - but thinks there is a small window that might draw scrutiny.

Speaking to brokers via a conference call conducted by On Wall Street, sister publication to Money Management Executive last Wednesday, Campanale said that the fee-based management business may draw some interest from securities regulators. One possible result, he said, is that brokers may be forced to justify the fees they charge through a simplistic standard, reporting process.

However, it may not be an easy task and one Campanale, the former CEO of Smith Barney's consulting group, does not advise.

"The regulatory agencies may have a hard time getting their arms around that," he said, adding that not all servicing of clients is equal. Therefore, it is acceptable to charge one client 100 basis points, for example, while collecting 130 basis points from another. While one client may be local and require minimal time and coaching, another may demand increased time and travel.

Campanale also emphasized that servicing a client and meeting their best needs doesn't necessarily require a lot of activity: "You make the recommendation that the client is to use five different managers. The goal is to not have to change it. That's how you service the client the best," he explained.

To avoid being engulfed in any sort of scandal, Campanale said the industry needs to just keep making sure clients know what they are being charged for through very clear disclosure. "When a money manager cuts a deal with a firm, if that fee is not passed on to the client, they need to know why," he said.

"My experience goes back a long way, to E.F. Hutton. The one thing we took a great deal of pride in [in the SMA business] is that you put the fee in front of the client all the time", he said. "If they have any questions, they have the ability to ask the adviser. Clarity and transparency and full disclosure are paramount. It's all about doing the right thing for the client. They want as much clarity as when they go to their doctor."

Campanale is not overly concerned, however, that the raucous mutual fund scandal will move into the SMA arena. Before regulators move to a "half-cocked standard," the industry's trade groups and representative organizations will "make sure that regulators are thinking straight," he said.

As for the damage that the scandal is doing to the mutual fund industry, Campanale said he actually sees some positives coming from the whole debacle. Spitzer, for one, is helping to clean up the industry, he noted. "I absolutely believe [the reforms] will be a good thing," he said.

"A client does business with you because they trust you," he continued, explaining that a client should have no doubt in their mind that an investment advisor is truly acting in their best interests and is not swayed by a benefit or reward for making one recommendation over another.

Nor does Campanale see this scandal as the straw that broke the mutual fund camel's proverbial back, or the deal maker for the rise of the separate accounts industry. "There's clearly a much faster growth rate in SMAs, but nonetheless, mutual funds are here to stay and a very viable option," he stressed.

However, that is not to say that Campanale has not seen some problems developing in the separate account industry that need to be addressed.

SMA upper management has been constantly reshaped, said Campanale, who himself spent 30 years at Smith Barney and had been CEO of that business for seven years. Often, the new management team is immediately charged with making something bold happen, he said. That team tries to figure out what will help the latest quarter figures instead of implementing a long-term solution.

"We do exactly the opposite of what we tell our clients. Do what's best in the long term," he suggested.

Another concern Campanale has noticed is the gravitation to the "hot-dot" mentality. "If you look at net new accounts to date, about 43% of them went into large-cap value," Campanale said. "It tells me that probably a lot of these advisers are putting their money with the hot-dot or those that had-hot performance the year before," he said.

Light Frank's Fire

At the time of the call he was in Detroit, where he keeps a home. Campanale said he officially departed from his long-time employer Smith Barney about a month ago. Currently, Campanale said he is listening for, and learning about, future employment opportunities and is hoping to work for an organization that will appreciate his internal "fire."

At one point, Campanale was asked about the possibility of joining J.P. Morgan, but he simply stated he could not comment on that at this time.

It was reported in December that a number of high-net-worth brokers at Merrill Lynch penned a letter to the firm's CEO Stan O'Neal urging him to hire Campanale in some role to help right the firm's misguided HNW business.

Campanale was dethroned from his post as CEO of Smith Barney's consulting group in August (see MME 9/1/03). However, he remained with the firm until December in an advisory role. He had been with the unit since its roots in the 1970s and rose to the CEO role in 1996. It is believed that Campanale and Smith Barney had a very different vision for the future of the firm's consulting group. Campanale's unwillingness to compromise his position is what ultimately led to the divorce, according to reports.

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