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SMAs Prepare for Baby Boomer Bonanza

Baby Boomers nearing retirement are in a fix: a fast-approaching retirement without enough retirement income.

Boomers have, more often than not, embraced a lifestyle beyond their means. Trading up for luxury goods, they have come to symbolize the "shop-till-you-drop" culture.

Now, as they approach retirement, a variety of retirement savings products confront them. Defined contribution plans, such as 401(k)s, today sometimes offer everything from mutual fund products to hedge fund products to separately managed accounts.

A relatively lesser-known vehicle than mutual funds, separately managed accounts are expected to play a significant role in the coming wealth management explosion. "The primary reason why people have an SMA is so that they have something with which to match a comfortable retirement," said Steve Gresham, executive vice president at Phoenix Investment Partners of Hartford, Conn., and author of The Managed Account Handbook.

While SMAs have stood on their own as a retirement savings solution for high-net-worth individuals, it is only now that firms are beginning to attach them to qualified retirement plans to capitalize on Boomers' impending retirement needs.

Because the minimum amount required to open an SMA is significantly high-typically starting at $100,000-SMAs offer added benefits like customization of portfolios and personal advice. They also provide tax advantages.

There are both opportunities for and challenges to managed account providers in light of the retirement savings crisis. What makes them especially important right now is that they are thriving at a time when people in most defined contribution plans have not optimized their contributions in those plans. A recent study by Bain & Co. shows that 66% of affluent Boomers underestimate how much money they will need to retire.

Another survey by TNS Financial Services found that in mid-2004, 7%, or 8.2 million households in the U.S., had a minimum net worth of $1 million, representing a 33% increase from 2003.

The growth of affluent investors combined with the realization among Boomers that they may be too late in saving for retirement represents a real opportunity for SMAs. In fact, even mutual fund companies want to get into the game and have begun offering SMAs. According to the Money Management Institute of Washington, assets in SMAs grew 15.9% to $576.1 billion in 2004.

While there isn't one product for retirement income, SMAs will play an important role for large IRA rollovers occurring in the next 10-15 years, said Lars Schuster, director of managed account research at Financial Research Corp. By 2008, for instance, FRC projects that $2 out of every $5 that goes into SMAs will originate from IRA rollovers.

Schuster stressed that Boomers aren't merely looking for steady retirement income but total wealth management, which encompasses everything from long-term health care needs to education funds for their grandchildren. Given this specific requirement, "SMAs can play a role in this because of the customization ability to them and the consultative aspect," Schuster said.

Going to Hurt Mutual Funds'

Another comfort that SMAs provide retirees is more control over their assets. "After the bear market of 2000-2002, people realized they lost their shirt and want to know that they can't get killed again," said Harry Clark, founder of Clark Capital Management Group of Philadelphia. The only way to get control is through an SMA, where a client has more input and the account is more transparent to them, he said. Offering SMAs in 401(k)s is certainly a new endeavor on the part of SMA firms, Clark said, and one that is "definitely going to hurt mutual funds."

A prime reason for that could be that fee-based advice is pushing money into SMAs. "Saving for retirement also means saving in fees," said Tom Meyer, CEO of Meyer Capital Group. Every time investors buy or sell a mutual fund, they pay a commission-based fee. SMAs, on the other hand, charge a flat, or asset-based fee, which could result in 2% to 5% in savings for investors in high turnover cases.

Still, it's going to take a major sales effort on the part of SMA managers to promote SMAs as a beneficial retirement saving strategy. But before managers can efficiently target SMAs to Boomers, they have a tougher audience they need to educate first: financial planners.

"The SMA industry is a very private, quiet industry. The reason [it] won't grow exponentially is because the industry has not brought any awareness," commented Chip Roame, managing principal at Tiburon Strategic Advisors, Tiburon, Calif.

Industries that have grown fast, such as the mutual fund industry, have done so because of their strong consumer advertising campaign, Roame said. Bringing that awareness is crucial because there's so much confusion about the different savings products in the marketplace, agreed Leo Pusateri, president of Pusateri Consulting of Buffalo, N.Y.