Separately managed account programs are the first type of packaged fee-accounts; in them, duties in the investment process are divided between the financial advisor, their firm, and one or more separate account managers. The advisor sells the program, recommends appropriate managers, completes paperwork, and conducts quarterly review meetings; the firm sets up accounts, prices securities, provides quarterly performance reports, provides billing services, and supplies marketing materials. The separate account managers, once hired, select securities, place trades, and monitor & manage their share of the assets.

After slowing with the depressed markets in 2000-2002, assets in separately managed account programs began to grow again in 2003, now having reached $720 billion. Specifically, assets in separately managed account programs were $79 billion in 1992, dipped to $67 in 1993, $75 billion 1994, $92 billion in 1995, $113 billion in 1996, and $145 billion in 1997. By 1998, growth accelerated and assets were $219 billion, up to $315 billion in 1999, $400 billion in 2000, $422 billion in 2001, stagnant at $422 billion in 2002, and up to $507 billion in 2003, $576 billion in 2004, $670 billion in 2005, and $720 billion today.

Net flows into separately managed accounts are $50 billion, up 10% from a year ago. Specifically, in 2004, flows were $46 billion. In 2005, they increased a bit, to $52 billion.

Multiple Style Portfolio Programs

Multiple style portfolios have emerged out of the concerns about separately managed accounts, helping address common complaints with the use of overlay managers. In the traditional separately managed accounts workflow, the client is in touch with the advisor, who is in turn in direct contact with the managers he chooses for the portfolio. The advisor is then responsible for manager selection and asset allocation decisions, which sometimes perhaps get shuffled down the priority list in rough times. In a multiple style portfolio programs, an overlay manager is placed between the advisor & money managers, whose job it is to pick managers, manage the allocation set, and manage issues such as taking gains & losses which clearly don’t get done often enough in traditional separately managed account programs.

The multiple style portfolio program market is now nearly $100 billion, growing at twice the pace of traditional separately managed accounts. Specifically, in 2003 the multiple style portfolio program market was only $23 billion. In 2004, that figure jumped to $49 billion, and today it totals $97 billion.

The average account size of multiple style portfolios has risen to nearly $500,000, up 25% since 2004. This suggests larger clients are being directed to multiple style portfolio programs, and perhaps away from traditional separately managed accounts. In 2004, the average account size of a multiple style portfolio was $380,000. In 2005 that figure jumped to $452,678, and in 2006 jumped again to $481,057.

Mutual Fund Wrap Account Programs

Mutual fund wrap account programs are the third type of packaged fee-accounts, and are similar to separately managed accounts programs, except that the programs choose mutual funds. In these programs, the financial advisor is responsible for selling the program, recommending an asset allocation, completing paperwork, and conducting quarterly review meetings with the clients. He then chooses mutual funds to be wrapped into the portfolio.

Mutual fund wrap account programs were introduced in the 1990s so that the fee-accounts model could be utilized with moderate net worth households; as a result they have been most popular outside of the wirehouses. As early as 1988, fee-only financial advisors began building mutual fund portfolios for asset-based fees (effectively self created mutual fund wrap accounts). In 1991, Fidelity Investments introduced the first packaged mutual fund wrap account programs, called Portfolio Advisors Services (PAS). The first phase of growth for mutual fund wrap accounts came between 1992 and 1997. In the early 1990s, non-wirehouse firms introduce packaged mutual fund wrap account programs as the wirehouses focused on separately managed accounts programs. In 1998, Arthur Levitt, chairman of the SEC, disparaged load funds at a conference in favor of mutual fund wrap account programs. Some other key steps came in 1998, when Fidelity Investments began offering non-Fidelity funds as part of its mutual fund wrap account program PAS, and in 1999 when Fidelity Investments lowered its mutual fund wrap account program minimum from $200,000 to $50,000. Recently even Charles Schwab & Company began offering an online mutual fund wrap account program – not surprisingly, cheaper than a lot of its competitors – which it launched in 2006.

Assets in mutual fund wrap account programs are now in excess of $300 billion. In 1990, assets were obviously $0. They grew to $3 billon in 1992, $7 billion in 1993, $12 billion in 1994, $21 billion in 1995, $36 billion in 1996, $54 billion in 1997, $69 billion in 1998, $109 billion in 1999, $127 billion in 2000, $128 billion in 2001, $170 billion in 2002, $200 billion in 2003, $230 billion in 2004, $265 billion in 2005, and $305 billion in 2006.

Mutual fund wrap accounts have continued to see growth in net cash flows with $50 billion in 2006, despite a slow period caused by the bear market. In 2000, cash flows into mutual fund wrap accounts were $50 billion, before slipping to $10 billion in 2002, and $12 billion in 2003. In 2005, they were back above the 2000 peak, at $51 billion.

Annuity Wrap Account Programs

Many financial advisors already manage annuities while others view all annuities skeptically. In total, annuity wrap account programs have minute assets in them, likely shy of $5 billion overall. Full-service brokers consistently downgrade the importance of annuities in fee-accounts, giving them only a 3.8 average score on a scale of one to ten. Their scores are relatively consistent as well, with the high score a six, and the low a one. These full-service brokers mention annuities will not be crucial to their fee-accounts businesses due to inexplicably high costs to their clients:

• “Annuities in fee-accounts could make sense, but the big problem is they are too expensive”
  
• “A massive internal fee for the annuity plus a wrapper? I don’t think that would be in the interest of my clients”
  
• “With the bad rap that annuities get for charging high fees, and then add to it another fee on top of that? I just don’t see how you could do that”
  

Other full-service brokers are more hopeful regarding annuity wrap account programs:

• "Annuities in fee-accounts make sense – theoretically they will lead to costs coming down in the future which is a great thing”
  
• “Annuities serve a valuable purpose in any context; if costs are sensible, they would make sense in fee-accounts too”
  

Unified Managed Account Programs

Unified managed account programs are the hot new fee-accounts product innovation, with multiple products being consolidated into a single account, with eight value added services at the account level delivered to clients. True unified managed account programs wrap together into one account multiple products, including separately managed accounts & multiple style portfolios, mutual funds, individual securities, ETFs, and alternative investments. From there, they add the eight value added services at the account level:

• Single proposal system
  
• Multiple products available
  
• Advisor customization ability
  
• Single account & related paperwork
  
• Coordinated pricing
  
• Automatic account rebalancing
  
• Account level tax management
  
• Consolidated performance reporting
  
  

To be frank, most of the programs being called unified managed accounts by firms today are great efforts down this path, but are not truly unified managed accounts as defined by the purists. In order to achieve a true unified managed account, the product needs to meet all of these eight value added service criteria.

Unified managed accounts, as they are named by their sponsors, represent only $24 billion in assets under management today. Again, while such programs are down the path, they have yet to meet all eight criteria of what could be called a true unified managed account.

Consider that if combined with separately managed accounts and multiple style portfolios, unified managed accounts as they are now would represent less than 5% of the market, actually just 3%. Its early days for unified managed accounts!

Broker Wrap Account Programs

Broker wrap account programs – such as LPL’s popular SAM product – are the seventh type of packaged fee-account programs. They are driven by advisors, who either on a discretionary or non-discretionary basis, provide advisory services to help clients choose investment products, individual securities, et al.

Broker wrap account programs were launched in the late 1980s, and have had a rocky history since then. They were pioneered by EF Hutton. In the first phase of their history, from 1992 to 1996, broker wrap accounts experienced robust growth under the leadership of the other national & regional broker/dealers. However, the second phase saw their growth slow, which came in the wake of the widespread introduction of fee-based brokerage accounts following the Tully committee and Merrill Lynch Rule, the latter which allowed for fee-based brokerage accounts. As assets poured into products like Merrill Lynch's Unlimited Advantages, broker wrap account programs were largely ignored. However, in 2003 the SEC’s reconsideration of those non-advisory accounts saw assets in broker wrap account programs jump again, as firms scared of compliance headaches simply transferred assets over to their advisory broker wrap account programs and other packaged fee-account programs.

Broker wrap account programs have held relatively steady in assts, until recently jumping up to $90 billion. Assets were at $54 billion in 2000, $64 in 2001 and 2002, $65 billion in 2003, and $70 billion in 2004. They jumped to $90 billion in 2005.

Fee-Based Brokerage Account Programs

The eighth and final type of packaged fee-account programs are fee-based brokerage account programs. In these accounts – which are brokerage not advisory – the client’s financial advisor charges fees for the ability to place as many trades as they would like, and any incidental advice that goes along.

The defining issue of fee-based brokerage account programs has been that advisors selling them are not legally required to do what is in the clients’ best interests; this idea fell under the microscope starting in 2003. For instance, in both accounts, the advisor must recommend suitable investments. Only in broker wrap account programs (which are advisory) are advisors required to act in the clients’ best interest, whereby in fee-based brokerage account programs they can also take into account their own and their firms’ interests.

Fee-based brokerage accounts have historically been one of the fastest growing products in the financial services industry and have reached nearly $300 billion. In 2000, fee-based brokerage account assets were $103 billion and this increased to $155 billion in 2001 and 2002. Growth was soon again realized, though, in 2003, as assets reached $201 billion. Today, there is $280 billion in fee-based brokerage accounts.

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To better understand the developments in Separately Managed Accounts & Other Fee-Account Programs, executives can purchase the full Tiburon research report where the key learnings highlighted above are addressed in greater detail. Please contact Brian Cotter at BCotter@TiburonAdvisors.Com.