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Separately Managed Accounts Poised for New Growth: But Investors Need More Education on Tax Advantages


Separately managed accounts are poised for new growth, regardless of the fact that only one in five investors is taking advantage of their benefits, such as tax optimization and account customization, a recent survey of financial advisers and individual investors by Citigroup Asset Management found. Citigroup, based in Stamford, Conn., surveyed 400 advisers in June and July and 505 investors in July and August.

SMAs are a fast-growing financial product because the professionally managed portfolios of individual securities can be fixed to meet specific investment needs. SMA assets totaled $620 billion during the second quarter of 2005, which is a 40% increase from two years ago, according to the Money Management Institute of Washington.

Forty-one percent of advisers surveyed said that SMAs make up half of their sales, and 73% said they expect their gross sales of SMAs will be higher than those of mutual funds within five years.

"Both advisers and investors believe that SMAs offer powerful benefits, but they don't necessarily agree on where the greatest value lies," said Peter Cieszko, head of U.S. retail & high-net-worth at Citigroup Asset Management. "Advisers tend to focus on product features, but investors are much more interested in the SMA as a tool that facilitates financial planning and communication. For advisers, we believe the practice management consequences of this research is considerable."

Finding that six in 10 advisers reported that fewer than 20% of their clients have claimed a tax gain or loss in the past three years, Citigroup concluded that investors are not taking advantage of the tax efficiency and account customization of SMAs, and that this may mean that what investors really value is the communication benefits, like access to investment managers, performance reporting and portfolio visibility.

Advisers see the value of SMAs differently than investors do, as only 12% of advisers said that "client access to manager" is extremely important. On the other hand, 50% of advisers said that "historical manager performance" is extremely important and 48% cited visibility of fees and another 48% operational support.

From the SMA owners' vantage point, 50% said "client access to a manager" is extremely important, and more than 60% cited "visibility of fees," "better communication and performance reporting" and "visibility of holdings."

If advisers were to better address these concerns, they would be able to build their SMA business with clients, Cieszko said. "Superior products with strong benefits will always be the foundation of their practice, but this research clearly suggests that the way to grow their business is the consultative, high-touch approach."

Nonetheless, SMAs have definitely scored points with investors. "One of our more striking findings is how little negative baggage' seems to be associated with SMAs among owners," said Dr. Brian Perlman, who directed the research, which was conducted by Mathew Greenwald & Associates of Washington. "In research we do on other financial products, we frequently see investor skepticism and sometimes second thoughts. SMA owners clearly are satisfied customers." More than 90% of SMA investors said they are satisfied with their SMA investment, and nearly half said they are very satisfied.

Almost half, 45%, of owners of SMAs said that they understand the product very well, while 49% said they understand mutual funds better than products like insurance, annuities, ETFs or hedge funds.

Most of the advisers as well as owners believe that SMA owners tend to take a long-term view. "From the beginning, part of the SMA promise' has been to attract and support serious, committed investors," said Keith Kinne, global head of products at Citigroup Asset Management. "Our research indicates that the SMA is actually playing this role.

"We think the market for SMAs may be significantly larger than many advisers believe," Kinne said, due to the fact that SMA owners say they "are confident about meeting their long-term financial objectives, and generally describe themselves as experienced, knowledgeable, long-term investors who are low risk takers and very concerned about taxes on their investments."

But more education about SMAs - and their tax benefits - is clearly needed to drive future market growth. Only 8% of advisers said that advisers in general understand SMAs very well, and only 55% that sell them say they are "very knowledgeable" in the area.

Advisers expressed a growing interest in SMA education for advisers, with 80% saying this would increase their interest in selling SMAs. Specifically, they want to know more about portfolio customization features, performance attribution/portfolio characteristics, industry trends, portfolio construction, blending investment manager selections and tax harvesting.

Investor education is also important, as 70% of advisers said they would be more inclined to sell SMAs if they believed investors were more knowledgeable about what they are and how they work.

Due to these findings, Citigroup Asset Management has launched a program for advisers called "At the Forefront: SMAs." The program includes education, information and tools to help advisers more effectively sell and support SMAs.

"It is evident that the SMA can be a tool for exemplary service to sophisticated investors with complex needs," said David Levi, managing director and head of U.S marketing and wealth management at Citigroup Asset Management. "It allows the adviser to focus on the most critical investment issues - from setting goals, to balancing portfolios and tax planning - and also encourages ongoing communications that can help support long-term relationships."

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