SMAs: Not Just For Wirehouses
July 2, 2007
Looking at the cultural chasm between independent and wirehouse broker/dealers, the fast-growing fee-based separately managed account business seems, to date, to have stayed on the wirehouse side of the divide.
But Curian Capital is trying to change that by showing that selling SMAs doesn't mean relinquishing control of their clients' money, but rather tightening the reins on their own businesses.
Advisers accustomed to living in a commission-based climate may not understand the principles of fee-based products or the ability to customize solutions, said Michael A. Bell, president and chief executive of the Denver-based registered investment adviser.
Part of the problem is cultural. "Independent advisers, unlike wirehouse guys, are used to doing things very independently and creating their own solutions," said Jean M. Sullivan, managing principal of Dover Financial Research in Westwood, Mass.
Independent advisers stake their reputations, and their sales pitches, on their ability to take a hands-on-approach, agreed Alois Pirker, a senior analyst at Boston-based Aite Group. "That's how they win clients over," Pirker said.
At wirehouses, on the other hand, education is about how to use and sell SMAs, and their spawn, unified managed accounts, has been a priority, Pirker said.
Wirehouses got a head start in the SMA world in the mid 1980s, when companies like Merrill Lynch and Smith Barney were building proprietary platforms, and sheer technology made SMAs much more costly to run.
Wirehouses, which underwrote stocks for major corporations and already ran pension and other large institutional funds, had access to huge pools of capital. Independents, by and large, were relegated to individual investors, for whom they applied modern portfolio theory using mainly mutual funds, said Lewis J. Walker, of Walker Capital Management, a financial consultant in Norcross, Ga., and one of the early independents to bring SMAs to the masses.
The result today is wirehouses' dominance of the $772 billion SMA business, said Cerulli Senior Analyst Jeff Strange. Large wirehouses are responsible for about 72% of sales, regional broker/dealers 8%, and companies like Curian, or competitors Lockwood or SEI, 11%. Independents, meanwhile, account for only about 3% per year.
The result, according to Curian, is a generation of commission-dependent advisers whose businesses are at risk due to the impending retirement of Baby Boomers, who will be drawing down assets, rather than buying more securities.
Curian said the first step to recovery is recognizing there is a problem. In a survey of 880 independent advisers-fewer than 20% of whom ran fee-based businesses-Curian found that 89% said that they spent less than half of their time working with clients or prospects. At the same time, 83% said it was at least somewhat important to them to "obtain better clients," while 60% admitted to not having a service model that would allow them to add more clients without adding significant pressure to their business.
Finally, when it came to which revenue model made the best sense, 75% of those surveyed had never analyzed the net margins of their own practices and considered steps to make those fatter.
"That is a dilemma," said Dan Maurer, senior vice president of marketing at the firm.
Thus, Curian has developed proprietary technology to offer advisers an SMA program that can make available to the average investor what used to be relegated only to the very rich. In fact, while SMAs are typically only offered to those with $250,000 or more to invest, Curian claims that the average account size is close to $130,000 and SMAs can make sense for clients with as little $25,000.
As for costs, the benefits of tax harvesting can outweigh the difference between managed accounts and mutual funds, if all costs are completely unbundled and then added to the planner's own expenses for chores such as due diligence, reporting and creating consolidated statements, said Vernon C. Sumnicht, a principal with Sumnicht & Associates in Appleton, Wisc. "I am delivering all of those little benefits to the client, it's not costing more, and it's giving him a whole lot of convenience," said Sumnicht, who does not use Curian. "There is a lot of efficiency in those SMA programs. I think as time goes on, mutual funds will be challenged a lot more to justify their cost."
That is not to say he subscribes to the school of using SMAs at any price for clients with $250,000, let alone $25,000. "You're better off putting them in a Vanguard index fund or some dang thing," he said.