Advisers Widely Divided on How to Sell Separate Accounts How advisers, and ultimately clients, perceive SMAs makes a big difference in whether anyone chooses to go with them.
May 17, 2004
Whether separately managed accounts are ultimately a product or a process, they ultimately require convincing the client to sign on the dotted line. In fact, SMA clients have to sign on many dotted lines. And as with any sales process, financial advisers find a variety of ways to persuade their clients to pick up that pen.
On one side stands a group of advisers and marketers who describe separately managed accounts as a kind of new and improved mutual fund. Jerry Wade of Wade Financial Management in Minneapolis might be said to be in that camp. He says that lately, his team often explains the advantages of SMAs by talking first about the shortcomings of America's favorite investment vehicle.
"The mutual fund scandal of the past nine months has really accelerated the ability to communicate the benefits. It's very easy and simple for us to first ask a question of our client or prospective client: Have you heard about anything that's going on in the mutual fund business?" After that, he says, he and his colleagues go through what he jokingly refers to as a list of the seven deadly sins of mutual funds: soft money, shelf space payments, boards that don't represent shareholders, 12b-1 fees and other issues that have become more widely known since the timing scandals broke.
On the other side stands a group that sees the separately managed account as something fundamentally different from mutual funds. This camp often describes SMAs as a process, not a product, emphasizing the SMA's ability to tailor itself to the individual's needs. While the benefits of individual stock ownership are still discussed, these advisers tend to focus more on the SMA advisory relationship itself and the advantages of customization. Brenda Blisk of Blisk Asset Management in McLean, Va., for example, said that she liked to refer to SMAs as "privately managed accounts." She said it's a subtle distinction but one that emphasizes the product's personalized nature.
But do these stylistic differences matter? Isn't this debate a bit like the guys in the beer commercial who used to yell, "Tastes great! Less filling!" back and forth at each other? The answer is, yes and no. To a degree, any professional adviser will go over all benefits of SMA programs. Yet some argue that one or the other approach may actually be discouraging adoption rates.
Scott MacKillop, a consultant to the SMA industry based in Evergreen, Colo., is one who thinks that describing SMAs as a process may ultimately be bad for the industry. "If you were really going to talk about the separate account product itself, it would be a pretty easy thing to do," he says. "If you were just going to talk in terms of an institutional separate account, it's just a money manager managing money with a particular style," MacKillop said. But when it comes to selling SMAs in the retail market, "a lot of people have problems, either intentional or unintentional, in distinguishing between the product and the process."
"They're always trying to draw this distinction between mutual funds being a product and separate accounts being a process," MacKillop said, "which I think is kind of a slick little marketing ploy, but it's not really accurate." By going on about all the reporting tools and services that tend to be included in SMA programs now, he added, it can become difficult for the listener to walk away with a clear idea of the underlying concept.
The upshot is that MacKillop believes marketing SMAs as a customized, ultra-high-net-worth investment product may have actually slowed down adoption rates. It leads ordinary mass-affluent investors to think that the SMA is a product only for the super rich, he said. Second, it discourages advisers from using SMAs in the first place.
"When somebody stands up in front of a crowd of financial advisers and says, a mutual fund is a product and separate accounts are a process, what happens in [an adviser's] mind? He's thinking, Well, I sell mutual funds. I know how to do that. This guy's telling me that the thing that I do every day when I go into the office, I'm not going to be able to do anymore.' That's such a big barrier for somebody to overcome, it just mystifies the whole idea," he says. The truth, he says, is that the process is fairly similar for separately managed accounts as for mutual funds. It begins with learning about the client's situation and crafting an asset-allocation model that meets those investment needs.