New Tiburon Research Report - Separately Managed Accounts & Other Fee-Account Programs

	Please click the image above to view the table of contents for Tiburon's best selling Separately Managed Accounts & Other Fee-Account Programs research report.

Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, releases key highlights from its best selling research report addressing separately managed accounts & other fee-account programs.

The purpose of this report is to detail the heretofore rapid emergence of the packaged fee-accounts market, and predict both the future size of this market and its upcoming key developments. This report provides readers with a comprehensive understanding of not only the most widely studied product – specifically, separately managed account programs (SMAs) – but also the seven other types of packaged fee-accounts programs, from both proprietary sponsors and turnkey asset management programs (TAMPs). This is the fifth draft of Tiburon’s research on this topic; at this point, it is fairly well developed.

Tiburon’s first draft of this report was published in 2001; that version focused narrowly on the emergence of independent fee-account programs, now often called turnkey asset management programs (TAMPs). This was only an emerging segment at the time, and that draft sought to organize that emerging business.

The second draft of this report, published in 2002, expanded the focus of the report to also cover the death of business-to-consumer separately managed account models, and the rapid emergence of the new breed of platform-oriented turnkey asset management programs, led by Envestnet and Advisor Port.

The third draft of this report, published in 2005, expanded its focus on the dominant programs of the wirehouses and regional brokerage firms.

The fourth draft of this report, published in 2007, sought to put separately managed accounts and the other seven types of packaged fee-accounts into their proper context within the industry, namely alongside the other more traditional fee-based investment services long provided by fee-only financial advisors (RIAs) and bank trust officers, tried to offer a comparison of traditional separately managed account programs and the emerging newer program type called multiple style portfolios, expanded the industry’s view of what is popularly (and correctly) perceived to be the industry’s eventual panacea – the unified managed account, and highlighted the best opportunities for TAMPs, enablers, and money managers.

This is Tiburon’s fifth draft of this report. This version focuses on addressing numerous recent industry developments (e.g., those around the Merrill Lynch rule), expanding the status of the eight types of packaged fee-accounts such as unified managed accounts, as well as lesser covered versions like annuity wrap programs, and reconciling managers lists to develop a more comprehensive manager appendix. In addition, this draft also revists future predictions and draw new and/or strengthen old predictions.

Key Highlights

This report has a long list of interesting facts to share.

The Evolution of the Separately Managed Accounts & Other Fee-Account Programs Business
This section provides key highlights including a history lesson about fee-accounts, their underlying driving factors, statistics on past growth, and where they are today:

• Fee-accounts, largely ignored until the Tully Committee of 1995, began to gain huge momentum in the late 1990s with individual investors
  
• Ultimately, the two core benefits of fee-accounts versus commission accounts are the alignment of advisor & client interests, and the promotion of client-oriented services
  
• Since 1996, packaged fee-accounts asset growth has also been explosive, reaching $1.5 trillion at the end of 2006
  
• The movement in the wirehouses is to unified managed accounts and broker wrap accounts
  
• Looking at the whole of the packaged fee-accounts landscape, separately managed accounts & multiple style portfolios are the dominant product by far, capturing over half the assets
  
• Across the eight types of packaged fee-accounts, there is over $1 trillion total, with separately managed accounts leading the way
  
• A traditional separately managed accounts program such as Merrill Lynch’s Consults splits duties in the investment process between financial advisors and one or more separate account managers
  
• After slowing with the depressed markets in 2000-2002, assets in separately managed accounts began to grow again in 2003, now having reached over $800 billion
  
• Net flows into separately managed accounts are $50 billion and up, up 10% from a year ago
  
• The average separately managed account is over $300,000, up substantially in the prior couple of years
  
• While the standard view of a separately managed program involve non-proprietary managers, one also needs to take into account the proprietary separately manage account programs which account for almost one-quarter of all assets
  
• Nearly half of separately managed account assets are held in IRA accounts. 45%, to be exact, are held in IRA accounts, with the 55% share of assets held in other types of accounts
  
• Wirehouses dominate separately managed account assets under managements, accounting for three-quarters. Third –parties, banks, full-service brokers, and other account for 6%, 7%, 6%, and 3% respectively
  
• Nearly all separately managed account investors are pleased with their investments
  
• Multiple style portfolios, the second type of packaged fee-accounts, have emerged out of the concerns about separately managed account, helping alleviate them with the use of an overlay manager
  
• The multiple style portfolio assets are now nearly $100 billion, growing at twice the pace of traditional separately managed accounts
  
• The average account size of multiple style portfolios has risen to nearly $500,000, up 25% since 2004
  
• Mutual fund wrap accounts were introduced in the 1990s so that the fee-accounts model could be utilized with moderate net worth households
  
• Mutual fund wrap assets have grown to over $300 billion
  
• 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
  
• Although still quite small, mutual fund wrap accounts are slowly accounting for a greater share of the mutual funds business
  
• Annuity wrap accounts are a relatively new fee-accounts innovation, and insofar have been limited both in number of programs and assets under management
  
• Annuity wrap assets are likely low
  
• Almost 75% of programs increased manager rosters recently
  
• ETF wrap account programs have emerged largely out of those questions about the true cost of mutual fund wrap accounts
  
• ETF wrap account programs assets are likely over $5 billion
  
• True unified managed accounts wrap together into one account multiple products, including separately managed accounts, multiple style portfolios, mutual funds, individual securities, ETFs, and alternative investments
  
• Unified managed accounts have increased over 75% since 2006 to $39 billion
  
• Almost one-half of affluent consumers have never heard of unified managed accounts
  
• Broker wrap accounts have held relatively steady in assts, until recently jumping up to $90 billion
  
• Fee-based brokerage accounts have historically been one of the fastest growing products in the financial services industry and have reached nearly $300 billion
  
• Fee-based accounts became illegal with the abolishing of the Merrill Lynch Rule in 2007
  
• Almost 75% of program increased manager rosters recently
  
• Training and education is a critical need in the transition to fee-accounts; both business transition and client transition issues are critical
  
• Only 38% of full-service brokers who recently converted to a fee-based business model reported some degree of suffering in terms of revenues
  
• All of the wirehouses have strongly incentivized their advisors to move towards fees; at Merrill Lynch & Morgan Stanley, they provide a 3% boost to $500,000 producers that would mean $15,000 in income to them to move to fees
  
• 70% of survey respondents rank operations as the top issue for separately managed accounts; 24% list reporting, 20% list personnel, 18% list fee pressure, and 12% list performance
  
• The Chartered Financial Analyst (CFA) Institute recently ended the four-year debate with the Money Management Institute and decided to give money managers the option of excluding separate account businesses from its new reporting standards
  
• Every financial services firm that wishes to offer clients fee-accounts has only two choices – become a proprietary sponsor, or outsource to a TAMP
  
• When it comes to analyzing the builders – proprietary sponsors – it all comes down to a simple breakdown of importance; there are the wirehouses, and there is everybody else
  
• Each of the wirehouses has been moving towards offering their reps a complete fee-accounts platform, complete with each of the eight types of fee-account programs
  
• Wirehouses absolutely dominate the packaged fee-accounts market today, with over two-thirds of the market share among the five of them
  
• Merrill Lynch and Smith Barney dominate the other players in total fee-accounts assets, each having over double the assets of the third leading player
  
• Merrill Lynch & Smith Barney have built the most economic fee-account businesses in the wirehouse channel to date
  
• The wirehouses’ market share of separately managed account assets has been declining over the past few years, but there is some evidence of a rebound
  
• The wirehouses are predominantly focused on separately managed accounts, with Wachovia Securities being the exception; both Smith Barney (about 75% of assets) and Merrill Lynch (about 45%) have a dominant share of their fee-accounts assets in separately managed accounts
  
• Wirehouses only control one-third of mutual fund wrap account assets, down from 48% in 1999
  
• Ameriprise Financial is the leader in mutual fund wrap accounts with the next leader Fidelity following with only $43 billion assets under management
  
• The mutual fund wrap account industry is much more fractured than is the separately managed accounts market, with the top two firms controlling only one-quarter of the market
  
• Smith Barney and Merrill Lynch hardly register in terms of mutual fund wrap accounts as a share of overall fee-account assets, with less than 10% in them each
  
• TD Ameritrade & Buckingham Asset Management might be ahead on ETF wrap account assets due to their early creation of their programs
  
• The only leading player yet focused on ETF wrap accounts is TD Ameritrade, far from a traditional fee-accounts powerhouse
  
• None of the players are focused on annuity wrap accounts of yet; Merrill Lynch likely has only a few bucks in them
  
• Unified managed account assets are led by Placemark
  
• Smith Barney dominates the broker wrap account market, with nearly three times the assets of its nearest competitor, at $31 billion
  
• Add up the wirehouses, and they control a total of nearly three-quarters of the broker wrap account market
  
• Merrill Lynch leads in fee-based brokerage account assets with almost three times the assets of its nearest competitor
  
• TAMPs have been emerging rapidly in the shadow of the proprietary sponsors; the benefits to TAMPs include them having no up-front costs, allowing firms great speed to market, having scale benefits, and fee-accounts being their core competency
  
• TAMPs have enjoyed tremendous success because they can get a comparable platform solution out the door to a new client for a fraction of the cost, in ninety days, with a fraction of the liabilities
  
• The growth of assets under administration of the TAMPs has been substantial, and now stands at about $250 billion
  
• In 2002, TAMPs represented an 11% share of the packaged fee-accounts market; in 2005, that share had risen to 16%
  
• There is some fierce competition at the top of the TAMP world, with three firms now exceeding $30 billion in assets under administration and ten having over $5 billion
  
• All told, the top ten TAMPs account for a hair over 90% of the TAMP market
  
• Although separately managed account programs are growing rapidly in the independent advisor markets, two-thirds of TAMP assets are still with mutual fund TAMPs
  
• Nonetheless, TAMPs’ share of separately managed account assets has risen to 12% from 7% in the past few years
  
• The number of TAMPs has been cut down extensively by acquisitions & rollup activity, falling from almost 70 in 1999 to about 40 today
  

Markets & Distribution Channels

This section details key highlights in regards to proprietary fee-accounts sponsors such as the wirehouses, turnkey asset management programs (TAMPs), TAMP users, and other fee-accounts enablers:

• Outside of the wirehouses, other national, and regional brokerage firms, most firms rely on TAMPs to develop fee-account programs
  
• LPL, Ameriprise Financial, and Raymond James are amongst the leading independent broker/dealers in fee-account assets
  
• Interestingly, more than three-quarters of independent advisors using TAMPs earned net incomes of more than $100,000
  
• Looking ahead, one-fifth of advisors who utilize TAMPs anticipate their incomes will grow to reach $500,000 or more in the next year
  
• Nearly all of the independent broker/dealers provide the infrastructure at least for a broker wrap
  
• Few existing fee-only financial advisors of any size use a TAMP because they pride themselves on manager selection and performance reporting
  
• Less than ten percent of fee-only financial advisors use separate account managers
  
• Brinker Capital is the most widely used TAMP amongst insurance companies
  
• The Big Four CPA firms’ fee-accounts models have faced three problems stunting their growth
  
• Many banks are more receptive to separately managed accounts than five years ago
  
• Banks’ separately managed accounts account still for less than 1% of their total assets
  
• However, the share of the industry’s separately managed accounts assets they are capturing are on the rise, now capturing 8% of overall assets
  
• Almost three-quarters of banks report needing to offer separately managed accounts to satisfy existing clients
  
• Envestnet and Fund Quest seem to be the most popular TAMPs among banks
  
• Brinker Capital is the most widely used TAMP amongst insurance companies
  
• Lockwood seems to be utilized most by CPA firms
  

Future Predictions for the Separately Managed Accounts & Other Fee-Account Programs Business
This section details future predictions for this rapidly growing business, including which channels are likely poised to help drive growth, and strategic conclusion for TAMPs, enablers, and money managers alike:

• The packaged fee-accounts market should reach nearly $3 trillion by 2010
  
• Program sponsors & money managers rate the future of fee-accounts relatively highly, giving them a 7.8 average score, out of 10.0
  
• In total, the entire fee-accounts market should grow to nearly $16 trillion in 2012
  
• In fact, packaged fee-accounts’ share of broader fee-account assets will likely lose some share to fee-only financial advisors in the future
  
• Separately managed accounts, multiple style portfolios, and unified managed accounts collectively are expected to increase their dominant share of fee-accounts assets in the future from about 55% today
  
• Assets in separately managed accounts will more than double over the next four years, reaching over $2.8 trillion in 2012
  
• The proprietary focus of the leading wirehouses’ separately managed accounts program is dwindling, more so at Smith Barney than Merrill Lynch
  
• Multiple style portfolios may soon rival mutual fund wrap accounts in assets under management, expected to surpass $500 billion in 2012
  
• Multiple style portfolios are expected to gain on separately managed accounts fast, from 14% of the broad separately managed account market today to 30% within give years
  
• Despite separate accounts’ likely success in capturing mutual fund assets, mutual fund wrap account assets should also rise substantially, reaching $400 billion by 2012
  
• Exchange traded funds are expected to proliferate in both proprietary packaged fee-account programs & TAMP programs
  
• Unified managed accounts, while the best fee-accounts idea to date, are not expected to pass $100 billion in assets until 2011; the slow growth is due o the fact that these are not yet fully developed
  
• Broker wrap account assets should surpass $200 billion by 2010
  
• In the future, databases that incorporate several investment vehicles into one will be needed – so financial advisors can compare across vehicles on one screen
  
• Efforts are being made to reduce costs and increase efficiency in fee-accounts, with process improvements likely in four areas; development in back-office technology are the most critical
  
• TAMPs, enablers, and money managers have varying opportunities for distribution, and obviously not the same
  
• For now, TAMPs have limited opportunities to tap into the wirehouse channel; however, if they ever being to use third-party platforms it would be a home run opportunity
  
• The biggest issues with other national brokerage firms for TAMPs, enablers, and money managers alike is three fold – they are traditionally commissions based, they have the same national footprint, and serve a lower net worth clientele
  
• Some senior bankers have expected the banking industry to gather a significant share in the separately managed account market
  
• Despite their excitement, banks’ market share of separately managed accounts assets is more likely to stall around 8%,
  
• Advisory 401K accounts and separately managed accounts as a product inside 401K plans will both do well, but these are two distinct opportunities, with one likely better than the other
  
• The TAMP market should grow substantially to $920 billion by 2012
  
• The acquisitions trend in the TAMPs market is likely to continue well into the future, eventually leading to a handful of powerful platform
  
• Envestnet stands alone as the largest potential TAMP acquisition; Brinker Capital is the next most attractive target
  There is good reason to think that a firm such as Envestnet – similar in size to Asset Mark, more entrenched as a platform provider – could fetch a number similar to or exceeding the $230 million paid by Genworth
  

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 covered in greater detail. Please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.