client). Depending on the firm, the size of the account, and the advisor’s clout, the conference will include someone from the investment department, whether a liaison, the portfolio manager, or someone in between. This person will likely not have the details of your client’s individual account, but should be able to explain the rationale of any transaction or explain their investment philosophy.
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29 C H A P T E R
3
The State of the Separate Accounts Industry
T
he five managed account segments, representing a total of $752 billion in assets, show a five-year growth rate of 32.1 percent, illustrating the stabil- ity gained through the advice and guidance that are inherent in managed accounts (Table 3.1). The most popular vehicle for fee-based accounts in terms of overall assets is still the separate account. The two primary segments of the separate account space are composed of both separate account con- sultant and proprietary consultant programs, totaling a combined $422.1 bil- lion at the beginning of 2002.A comparable benchmark in professionally managed financial products is the growth in long-term mutual funds, which ended the year (2001) with $4.1 trillion in assets under management, representing −7.5 percent growth for the same year. Separate account and proprietary separate account consultant programs both finished the year posting growth of 6.8 percent.
The nation’s financial product distribution powerhouses continue to dom- inate in managed account assets, with these top 10 firms representing more than 80 percent of the industry. The 60,000 financial advisors employed by New York wirehouses (firms 1 through 5 shown in Table 3.2) account for approximately 70 percent of the industry, with some of the largest regional, independent, and third-party firms rounding out the group. Several of these top firms have also taken advantage of the lucrative prospects of distributing
a proprietary asset management product through their brokerage force, as evidenced by the 5 percent or greater share of fee-based assets from propri- etary consultant programs at 4 of the top 10 firms (Table 3.2).
Until recently, there was little need for innovation in the managed accounts industry, as tier I financial representatives (the highest tier of top-producing representatives according to Cerulli’s market segmentation) historically gen- erated the bulk of separate account consultant programs. However, this elite group is a small subset, accounting for only 1 to 2 percent of total wirehouse representatives. Looking forward, managed account industry growth will increasingly be dependent upon the larger ranks of tier II and tier III repre- sentatives embracing the managed account concept and selling it to their less well-to-do clientele. Most representatives want to be Tier I—you get there by using managed accounts and by attracting large clients. This is a self- reinforcing business.
Cerulli Associates believes that educating representatives who are new to managed account products on the attributes of managed accounts will be the cornerstone upon which the industry will expand to incorporate all tiers of representatives. Brokerage firms are promoting managed accounts from the top down and new-broker training is focused on managed accounts. Also, capital is being invested to simplify the managed accounts and investment consulting approach to assist in encouraging all tiers of representatives to embrace fee-based managed account business.
For the separate account consultant and mutual fund advisory program segments, 2001 reflects a deviation from the solid double-digit growth that both industries have seen in the past decade. Fee-based programs have shown resilience during down markets, attributable to larger trends, including advice 30 THE BASICS
TABLE3.1 Managed Account Growth Rates and Assets (in $ Billions) 1998 1999 2000 2001 2002 Separate account consultant $188.8 $249.9 $299.1 $319.4
programs
Proprietary consultant programs — — $96.2 $102.7 Mutual fund advisory programs $66.0 $93.2 $124.8 $126.3 Rep as portfolio manager $36.2 $63.5 $71.8 $63.9 Fee-based brokerage $32.0 $101.5 $149.6 $154.6 Total managed accounts industry $323 $508 $741 $769 $752
Source: Cerulli Associates.
TABLE3.2Top 10 Program Sponsors,All Managed Account Segments Managed Accounts Program Asset Mix* SeparateProprietaryMutual Total Firm Market AccountSeparateFundRep asFee-BasedManaged Share ConsultantAccountAdvisoryPortfolioBrokerageAccount of Total Programs AssetsPrograms Manager Assets Assets FirmIndustry(%)(%)(%)(%)(%)($ billions) 1.Salomon Smith Barney25.442.132.25.512.87.4$194.7 2.Merrill Lynch25.337.014.46.33.239.1193.5 3.UBS Paine Webber7.951.2—8.211.828.860.4 4.Morgan Stanley7.451.17.26.20.734.956.6 5.Prudential Financial4.650.62.616.113.517.234.8 6.SEI Investments3.64.7—95.3——27.6 7.American Express2.48.7—91.3——18.7 8.First Union Securities2.439.1—16.818.026.118.3 9.Raymond James2.227.834.0—0.737.517.1 10.Fidelity Investments2.2100.016.8 *Figures in bold denote each firm’s top managed account segment. Source:Cerulli Associates.
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and guidance, distributor (brokerage firm) push for fee-based relationships, and the money flood of IRA rollover assets, all of which channel well into the construct of managed account programs.
Recent events have driven investors to realize their need for advice and guidance from professional financial advisors. One indication of this effect is evidenced by the transition of several mutual fund companies toward advi- sor-sold channels and away from direct-to-consumer efforts.
These firms are changing the way their brokers are compensated to drive more assets into fee-based accounts. The trend of asset flows from company- sponsored retirement savings to individual accounts in the form of 401(k) distributions is a phenomenon that aligns well for managed accounts when spon- soring brokerages are able to catch these assets. These sizable sums are appro- priate for either mutual fund advisory or separate account consultant programs.
Cerulli Associates expects the recent growth rates of the separate account con- sultant programs to continue (Figure 3.1). For separate accounts, this equates to 20 percent annual growth, or more than $680 billion in assets by year-end 2005.