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SMAs Face Competition, Challenges

Managed account platform providers, those vendors who provide various services to financial services companies that offer managed account services to wealthy clients, may be able to boast about tremendous growth in assets in the years ahead, but they are nonetheless in for some challenges.

The biggest test will be the increasingly competitive landscape within which platform providers will go head-to-head for a larger slice of the increased dollars that financial service are projected to spend for managed account technology.

That's the prediction of a new report from TowerGroup, the research and consulting firm in Needham, Mass. According to the report, as managed account assets grow, the amount spent by financial service firms to purchase services from platform providers will also grow significantly. Larger platform providers, those with $2 billion or more in managed assets, include AdvisorPort, Brinker Capital, Envestnet, Lockwood, Prudential Investments, SEI Investments and SunGard Advisor Technologies.

TowerGroup estimates that by 2008, brokerage companies will be spending a whopping $439 million for SMA technology, up almost 70% from the $259 million spent in 2003. By the end of this year, TowerGroup projects that firms will have forked over more than $300 million to service vendors (see accompanying chart). These technology and processing services typically include routine back-office servicing such as portfolio accounting, performance reporting, and marketing support, and may also include the identification and selection of money managers, as well as ongoing monitoring, and possible termination, of managers.

According to the report, the whole due diligence process should begin with a service firm identifying potential money managers to be further evaluated and proceed through several steps ending with manager monitoring and investigating problems that surface with managers. That whole process is what managed account platform providers now hold out as their key points of differentiation. But right now, the process is a bit "squishy" and hard to measure, said Matt Schott, a senior analyst with TowerGroup and author of the report. In addition, there are vast differences in how platform providers handle the various steps in the process, including how likely providers are to fire a manager. "It's not like buying a five-star mutual fund," Schott added.

Squeezing Margins

Platform service providers will also likely see their fees squeezed in coming years. Vendors will be pressured to offer discounts in order to prevent some of the larger financial service companies from taking this costly managed account servicing business in-house as managed assets grow, TowerGroup predicts.

Moreover, as margins compress and larger processing firms seek to broaden out their capabilities in order to accommodate newer mainstream products, such as separately managed accounts, mergers are likely to continue. Acquisitions have been the order of the day for the past few years, evidenced by PFPC's purchase of AdvisorPort, Bank of New York's purchase of both Lockwood and Pershing, SunGard Data's purchase of London Pacific Advisors to form the new SunGard Advisor Technologies, Envestnet/PMC's recent merger with Net Asset Management, and the combination of five firms to form US Fiduciary Services.

But don't think that M&A mania will prevent newcomers from stepping in and setting up shop, TowerGroup said. New entrants to the market, such as Curian Capital and GlobalBridge, can and will be successful by targeting niche markets and perhaps building alliances with other key firms. These independent firms will "play where the deep-pocket players are not focusing," the reported noted.

A Unified' Front

Managed account servicing vendors will also need to continue to evolve with the needs of the industry. That evolution must include being able to offer more holistic investment strategies that may include mutual fund wraps and indexed product capabilities. As well, servicers must inevitably be moving toward the unified managed account capability, the report said.

"The industry needs to see it as more of a platform, not an account," Schott said. In fact, the whole unified managed account title is a bit of a misnomer because it will encompass looking across various products, investments and client registrations, not all held under one unified account, but within the same broad platform, he added.

The current definition of a unified managed account, which generally refers to multiple strategies and/or multiple products under one registration and within one brokerage account, "is somewhat limiting as it does not reflect the real world financial needs of many investors," said Greg Horn, senior vice president and managing director of PFPC managed account services and founder of AdvisorPort.

"We believe it is essential for our industry to migrate to an overarching view for multiple registrations across individual accounts, joint accounts, IRA rollovers, trust accounts and qualified plans," he said. "Whether a client is an individual or represents an extended family, this allows for more integrated risk profiling and rebalancing of that client's broad holdings." Horn suggested that the industry adopt a clearer label of "unified managed portfolio."

Communicating True Value

Another challenge lies in presenting to clients the true value of the separately managed account concept, a challenge that will not only be facing platform vendors, but financial services companies as well, noted the report. There will be lots of room for companies to determine how they can present the value that is being created through the use of separate accounts, Schott noted.

One way to address this would be by tying client reporting to the progress made toward their individual financial goals, Schott said. Savvy firms will likely begin benchmarking how well they have served to meet the client's objectives, he added.

In addition, as aging Baby Boomers begin retiring and start withdrawing assets, the shift from asset accumulation toward income payout and managing assets under a withdrawal scenario will pose challenges, Schott said. Clients will want to know how to adjust their portfolios to accommodate the payout phase. That will need to be addressed through managed account platforms as well, he added.