What about the independent world where separate accounts are booming?
This group consists of independent advisors, CPAs, banks, and insurance agents. The group as a whole is not as well reported, and most all use turnkey asset management programs (TAMPs). Therefore, it is harder to get your hands around their statistics. There is more room for interpretation, and it’s easy to count the same dollars twice if you’re not careful.
TAMPs are the independent advisors’ version of wirehouse wrap pro- grams. These widely available, fee-based programs (which include separate accountandmutual fund programs) allow independent broker-dealer repre- sentatives, fee-only financial advisors, insurance agents, certified public accountants (CPAs), and banks to compete in the growing market of fee- based advice. TAMPs generally provide four services:
1. Technology for client profiling, asset allocation, investment policy statement creation, and proposal generation
2. Assistance in investment selection
3. Management of the ongoing monitoring, rebalancing, and reallocation processes
4. Performance measurement, performance reporting, and billing services The first TAMPs emerged in the mid-1980s, and the number of TAMPs has grown steadily since then to 57 at year-end 2001. Assets of these TAMPs have likewise grown steadily to $78 billion, but this is still far smaller than the bro- kerage channel wrap market (Figure 3.4).
The independent markets are moving quickly to embrace separate accounts, though, and several new platform-oriented TAMPs have emerged.
At this point, separate account TAMP assets are showing similar concentra- tion to the overall market; Lockwood and five other separate account TAMPs control 83 percent of the separate account TAMP market.
Charles Schwab has gradually—and without much fanfare—hit the charts.
38 THE BASICS
Schwab’s managed account program was launched just three years ago. They ranked 10th with $8 billion, or 2.2 percent of the market, as of September 30, 2001. That puts Schwab ahead of such well-established independent players as Brinker Capital, one of the oldest providers of managed accounts. Schwab has tied with First Union Securities and is within striking distance of Lock- wood Financial, which has a 2.7 percent share.
The average separate account TAMP uses 59 managers and 111 products.
Leading wrap account programs listed Brandes, Rittenhouse, and Alliance The State of the Separate Accounts Industry 39
SEI Lockwood Frank Russell Envestnet PMC Brinker Capital Vista Analytics FundQuest RTE Advest Centurion London Pacific AssetMark Asante
$28.0
$8.7
$7.5
$5.9
$3.0
$2.8
$2.5
$2.0
$2.0
$1.9
$1.7
$1.7
$1.6
Total: $78.0 billion Assets Under Management
FIGURE3.4 Market-Leading TAMPs in Terms of Assets.
Source: Tiburon Strategic Advisors.
Capital as their favorite managers (Figure 3.5). Other leading managers include Rorer, Roxbury, Lazard, and Lord Abbett. The wirehouses can only work with the largest money managers, who can handle their flow of new assets. Wirehouses also need to have many of the same managers as their peers as they attempt to recruit representatives from each other. Forcing a client to move assets from a manager simply because it is unavailable at the new firm can be a recruiting deal killer.
Tiburon Strategic Advisors surveyed TAMPs for their favorite managers.
They received a long list of candidates including Capstone Asset Manage- ment, Holdsmith & Yates, McKinley Capital, MJ Whitman, National Asset Management, Systematic, and Tom Johnson. While more traditional choices like Brandes and Lazard were also mentioned, none of these other firms are on the top-10 list of separate account wrap managers.
It has long been speculated that there is a pending departure of many wirehouse representatives to the land of independence. This would have sig- nificant impact on the structure of separate account independent TAMP pro- grams. If we see a flood of fee-oriented wirehouse brokers leaving for the ranks of independent advisors, we would expect to see the TAMPs’ lists start to mirror those of the wirehouses.
Across TAMP programs, the descriptions of separate account manager and mutual fund selection processes are consistently complicated. Many fol- low some version of the four ps: process, performance, people, and philoso- phy. Key members of the decision-making process vary. Nearly two-thirds of mutual fund wrap and TAMP sponsors have a formal committee or informal group who decides which managers to include in their programs. Prudential, for instance, has a group of analysts who rely on a 10-step process to assess portfolio managers, although only 14 percent of programs use an outside con- sultant.
Screening is the dominant way of finding new separate account managers.
Some databases are very comprehensive, but their accuracy may be ques- tionable, because managers give information to them voluntarily.
Checkfree’s Mobius offers the most popular technology used to screen separate account managers. Other popular choices include PSN/Effron, and Nelson’s Directory.
Style adherence was the most highly rated selection criterion among TAMP programs. Style consistency was also ranked as an important criterion.
Comments included: “The most important criteri[on] for us is for the man- ager to have a well-defined, clearly articulated, and systematically imple- mented process.” And, “For us, the experience of the portfolio manager is the most important criteri[on].”
40 THE BASICS
The State of the Separate Accounts Industry 41
FIGURE3.5 Example of the Top 15 Managers of Separate Account Wirehouse Consultant Program Percentage of Assets. These 15 Managers Represent $320 Billion in Assets, First Quarter of 2002.
Source: Cerulli Associates.
On the flip side, manager turnover was the most important criterion for being eliminated. Manager turnover and style drift can cause serious prob- lems. Loss of key investment personnel was cited as an important reason for dropping a manager.
A wide variety of mutual fund companies are just now starting to make moves to enter the separate account wrap and TAMP business. Fidelity, Van- guard, Putnam, American Funds, MFS, Oppenheimer, T. Rowe Price, and American Century are all long-awaited entrants. Although well known, these firms could find it more difficult to penetrate the separate account wrap pre- ferred manager lists due to their overcrowded nature.