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SMA Bigs Look to Improve Profitability

NEW YORK - With roughly $600 billion in assets under management, the separately managed account business continues to grow exponentially as members of the adviser community become more and more comfortable with how these nuanced investment vehicles work.

The Money Management Institute, the industry's largest trade association, hosted its 2004 Fall Conference here last week as representatives from money managers, sponsor firms and third-party service providers met to discuss the biggest challenges facing their industry. The conference, entitled Managed Account Solutions, provided a snapshot of the current operating environment including the obstacles firms face in carving out a piece of the SMA pie.

In his opening remarks, MMI Chairman Peter Muratore stressed the importance of delivering "objective, personalized advice" to the client and that a successful investment model requires a lot more than just "a good idea at the right time." He also emphasized the increasingly crucial role of technology in reaching critical mass in the managed account space.

At present, there is no universal system of connectivity that enables each working part of the SMA machine to talk to each other. The MMI meetings, he said, provide a forum for contending points of view to be heard about how to address some of the industry's chief concerns.

Chuck Widger, president and chief executive officer of Brinker Capital, told attendees in his opening remarks that the industry has made great strides since its infancy, having transformed itself from a "curious, misunderstood niche known as wrap accounts to a mainstream investment choice known as separately managed accounts." A positive sign for growth was that there were only two asset managers in the audience who have yet to get into the SMA business, based on a show of hands.

In the first panel session of the conference, Paul Schaeffer, managing director of SEI Investments, said that while double-digit growth for the industry is commendable, it must be put in perspective, illustrating in a slide presentation that the growth spurts for managed accounts have "mirrored the volatility of mutual fund assets." He also noted that the big wirehouses continue to dominate the distribution channel and that assets are concentrated among a few big firms, a trend that has started to change very slowly with banks now penetrating the marketplace.

On a more positive note, Widger was quick to point out that the industry posted net flows of $18.2 billion in the second quarter, representing an all-time high. In addition, he said that while the style box hasn't changed too much in recent years, there has been a noticeable increase in international exposure. Much of the cash flowing to managed accounts these days comes in the form of IRA rollovers, having contributed to 20% of flows last year. The conversion of individual securities represents 40% of new assets, he said. Ultimately, Widger believes SMAs' three appealing attributes will propel growth going forward: tax efficiency, concentrated portfolios and customization.

Sharon Highland, director of BlackRock Financial, took her turn at the podium, echoing Muratore's sentiment that the industry is "pretty fragmented" and that current operating platforms "will not support the growth of the business." For example, in order to incorporate exchange-traded funds, mutual funds and hedge funds into an SMA program and its reporting process, there must be a significant investment in technology. In short, the industry must improve open architecture and operational performance in order to grow. From a marketing perspective, sponsors and managers must not make product-to-product comparisons but, instead, focus on what is right for the client.

In a later panel discussion entitled "Improving Profitability," marketing executives Kevin Hunt and Bill Morrissey from Old Mutual and LPL, respectively, noted that while there are "significant barriers to entry," growth is inevitable. Hunt cited estimates that peg assets under management at $1.8 trillion by 2008, with 50% of that being driven by the market. Assets coming from IRA rollovers are growing at a clip of 20% a year, and he expects they will "increase dramatically." He also said that lowering the bar for accessibility to the SMA market, particularly through lower minimums, will drive growth.

Morrissey told attendees that as an industry, they must get away from the "product push" and get back to basics with advisers by becoming more client-centric. "Training is key," he said. Baby Boomer assets will be the bread and butter for years to come, and it is important to be able to provide them with the necessary services needed to live in retirement. "We've only reached the tip of the iceberg," he said.

In terms of product innovation, it is important that firms eliminate silos so that sponsors and managers can work together to create something, Hunt said. "It's too important for one person to put it together," he said. Responding to a question about preventing cannibalization within the industry, the panel encouraged attendees to remember their passion, be innovative and focus on the client. And with that, he sounded the battle cry for his constituents.