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, released a newly updated research report addressing separately managed account & other fee-account programs earlier this year.

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.

One chapter of the report discusses each of the eight packaged fee-account program types, addressing the way they are structured, their histories, and their individual growth expectations. The report also addresses the key issues that have either helped or hurt each program type over the past handful of years.

There are eight types of packaged fee-account programs:

• Separately managed account programs
  
• Multiple style portfolio programs
  
• Mutual fund wrap account programs
  
• Annuity wrap account programs
  
• ETF wrap account programs
• Unified managed account programs
  
• Broker wrap account programs
  
• Fee-based brokerage account programs
  

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. Specifically, separately managed accounts & multiple style portfolios have 53% of the collective assets in packaged fee-accounts. The next largest product, fee-based brokerage accounts, lies dominated by them in share with only 22% of the assets. The third largest product, mutual fund wrap accounts, has 13% of the assets. From there is a steep drop-off to broker wrap accounts (7%), early unified managed accounts (< 2%), ETF wrap accounts (< 2%), and annuity wrap accounts (1%).

Separately managed accounts have held dominant share even in light of the introduction of the five other types of fee-accounts programs. Their share of the assets in 2001 was basically the same it is today, at 55%. In 2001, fee-based brokerage accounts had 22% of the assets, mutual fund wrap accounts had 17%, and broker wrap accounts had 8%. Those shares were consistent in 2002. In 2003, separately managed accounts & multiple style portfolios ceded share to fee-based brokerage accounts, which rose to 23% as the former fell to 52%. Those shares were nearly equal in 2004, until 2005 when ETF wrap accounts and early unified managed accounts took a couple of points from more established products.

Separately Managed Account Programs

Separately managed accounts are the first type of packaged fee-accounts; in them, duties in the investment process are split between the financial advisor, their firm, and one or more separate account managers. Whereby 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, from there select securities, place trades, and monitor and manage their share of the assets.

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. Assets have experienced tremendous growth in the past seven years, while growth was fairly flat between 1992 and 1997. Specifically, assets in separately managed accounts 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, $720 billion in 2006, and $889 in 2007.

Net flows into separately managed accounts are $50 billion and up, 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 account, helping alleviate them with the use of an overlay manager. 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, asset allocation decisions, and the like from then on, which sometimes perhaps get shuffled down the priority list in rough times. In a multiple style portfolio, between the advisor & money managers is placed an overlay manager, whose job it is to pick managers, manage the allocation set, and handle things like taking gains & losses which clearly don’t get done often enough in traditional SMAs.

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

There are two approaches for multiple manager multiple style portfolios – model and allocation approaches – with the allocation approach granting more control to managers & hence garnering their preference. In essence, model approaches (preferred by overlay managers) place more power & control in the hands of the overlay manager, whereas allocation approaches keep model customization in the hands of the money managers, and money managers are more involved in placing trades. Allocation approaches are preferred by money managers.

Mutual Fund Wrap Account Programs

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

Mutual fund wrap assets have grown to over $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, $305 billion in 2006, and $368 billion in 2007.

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 to 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 fee annuities while others view all annuities skeptically. In total, annuity wraps have minute assets in them, likely shy of $5 billion overall.

Full-service brokers consistently downgrade the importance of annuities in fee-accounts in the future, 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 wrap 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”
  
• “I don’t see an annuity wrap having a place in the industry at all in the future”
  
  

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”
  
  

ETF Wrap Account Programs

ETF wrap account programs have emerged largely out of those questions about the true cost of mutual fund wrap accounts. Not surprisingly, the generally innovative fee-only financial market is leading edge in this category, adopting fee-based ETF usage en masse well in advance of their competitors.

In the packaged fee-accounts context, ETF wrap account programs are still well behind the other types. They have, at most, $5 billion in them today. Some firms have been more innovative on this front than others. AG Edwards was perhaps the first proprietary sponsor to launch an ETF wrap account.

ETF wrap accounts are innovative in fee-accounts primarily in that they solve the primary limiting factor of traditional mutual fund wrap account programs – cost. If you take into account their low turnover, ETFs can knock capital gains distributions from the 2.50% number floated by indexing supporters down to something closer to 25 basis points. Knock out the 1.50% manager fee to 25 basis points (or less) for a large cap equity index manager (likely all a $50,000 account might get, anyhow), and charge the same 1.50% wrapper, and the client might save as much as 3.50% in total expenses to bring them closer to matching the market.

Unified Managed Account Programs

Unified managed accounts are a 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 the client.

Unified managed accounts are the comprehensive innovation long sought, with multiple products being consolidate into a single account, with eight value added services delivered at the account level.

Unified Managed Accounts have increased over 75% since 2006 to $39 billion. Specifically, unified managed accounts accounted for $19 billing in 2005 and $22 billion in 2006.

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. From there, they add the eight value added services on the account level:

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

In order to achieve a true unified managed account, the product needs to meet all of those eight value added service criteria, while many of the existing products are at least missing some of them.

Broker Wrap Account Programs

Broker wrap accounts, such as LPL’s popular SAM product, are driven by financial advisors and are the seventh type of fee-accounts program. They are driven by the advisor, who either on a discretionary or non-discretionary basis provides advisory services in helping clients choose investment products, individual securities, et al.

Broker wrap accounts assets were holding relatively steady, until recently jumping to $90 billion in 2005 with displaced fee-based brokerage asset. 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-accounts are fee-based brokerage accounts. In these accounts – which are brokerage, and not advisory – the client’s financial advisor charges a share of fees for the ability to place as many trades as they would like, and any incidental advice that goes along with that.

The definition issue of fee-based brokerage account programs as been that financial advisor selling them are not required to do what is in the clients best interest; this idea fell under the microscope starting in 2003.

Fee-based brokerage accounts grew rapidly from less than one million in 2003, but slowed beginning in 2004 and are likely way down now. In 2001, there were nearly a million accounts. In 2002, there were 1.05 million, 1.19 million in 2003, and 1.22 million in 2004. With all the regulatory concerns, this figure has likely slipped since, however.

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 $300 billion in fee-based brokerage accounts.

More Information

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.