See Table of Contents for Tiburon's Fee-Accounts Research Report

Tiburon Strategic Advisors, a market research & strategy consulting firm serving a wide variety of financial institutions and investment managers, is pleased to announce the release of its new research report on Fee-Accounts. This research release summarizes some of the report's key findings.

The purpose of this report is to provide readers with a comprehensive understanding of the packaged fee-account programs market, including both separately managed account programs and other fee-account programs. No individual trend across the financial advisor channels is as profound as the shift away from commission brokerage towards the eight types of fee-account programs: fee-based brokerage accounts, broker wrap accounts, mutual fund wrap accounts, annuity wrap accounts, ETF wrap accounts, multiple style portfolios, separately managed accounts, & unified managed accounts. This comprehensive report should serve as a bible for any existing or new participant in this market; it includes statistics on the leading players, details of each market segment, highlights of innovations in the four components of fee-account programs, & predictions for the future. This is the fifth draft of Tiburon’s research on this topic.

Tiburon’s first draft of this report was published in 2001; that draft consolidated prior Tiburon research into one report and was 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.

Tiburon’s second draft of this report was published in 2002; that draft addressed the death of the business-to-consumer separately managed account programs that had arisen in the web craze of the late 1990s, and the rapid emergence of the new breed of platform-oriented turnkey asset management programs, led by Envestnet Asset Management and Advisor Port.

Tiburon’s third draft of this report was published in 2005; that draft expanded its focus on the dominant programs of the wirehouses and regional brokerage firms.

Tiburon’s fourth draft of this report was published in 2007; that draft 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 management services provided by fee-based financial advisors (RIAs) and bank trust officers. That draft also sought to offer a comparison of traditional separately managed account programs with the twin trends towards multiple style portfolios and unified managed account programs.

This is Tiburon’s fifth draft of this report; this draft better aligns this report’s structure with that of other Tiburon research reports, fleshes out the market history of fee-account programs (e.g., developments around the Merrill Lynch rule), and refines some other storyline points. This draft also includes enhancements to the profiles of some core Tiburon clients, including Advisor Software, DST Systems, Dunham & Associates, Envestnet Asset Management, Fiserv Corporation (Fiserv Investment Services), My Vest Corporation, Morningstar, Northwestern Mutual Life, Russell Investment Group, & SEI Investments

Key Findings
This report has a long list of interesting facts to share:

Evolution of the Separately Managed Accounts & Other Packaged Fee-Account Programs Business
This chapter highlights the evolution of the separately managed accounts & other packaged fee-account programs business:

Market History

  • Morgan Stanley was hit with a $6.1 million fine for improprieties in its fee-based brokerage accounts program similar to those found in the Raymond James case example
  • The Merrill Lynch Rule, was abolished in 2007 causing reps offering fee-accounts to convert them to another compensation arrangement or register as an investment advisor

Market Growth

  • Wirehouses, banks, & insurance companies fee-account department generate $4.5 billion, up over 100% since 2000

Key Issues

  • Financial advisors believe that the asset allocation strategies they implement are a key part of their value proposition
  • The median number of mutual fund companies used in mutual fund wrap accounts is 20, with a range of 1 to 300
  • Almost 400 separate account managers compete in the separately managed accounts market, up over 100% since 2001
  • The top twenty five separate account managers account for almost three-quarters of assets
  • In separately managed account programs, the median number of products is 70, with a range of 32 to 200
  • Additionally, large cap equity continues to gather over half of new separately managed account assets
  • Favorite separate account managers tend to get 5% to 25% of assets in separately managed account programs
  • Almost three-quarters of managers plan to increase their number of sponsor relationships
  • Morningstar is the most popular technology used to screen mutual fund managers
  • Over half of separate account managers have separately managed account specialists
  • Operating expenses can eat up 25% to 35% of separately managed account revenues for separate account managers. The remaining 65% to 75% of expenses are other expenses
  • Two-thirds of technology spending is spent by sponsors

Leading Fee-Account Program Sponsors (Proprietary & TAMPs)

  • Ameriprise Financial & Fidelity Investments are the leaders in mutual fund wrap accounts with $48 & $43 billion assets under management respectively
  • Leaders in ETF wrap accounts may include AG Edwards, TD Ameritrade, & Buckingham Asset Management
  • Envestnet and Smith Barney dominate the smaller broker wrap account market with more than double the assets of its nearest competitors

Market Segmentation
This section explains the market segmentation of the fee-accounts industry:

  • TAMPs are gaining a larger share of the overall packaged fee-accounts market, specifically now accounting for over 15% of the market

Turnkey Asset Management Programs (TAMPs)

  • Advisor Port was the largest TAMP acquisition with $13 billion assets under management & administration
  • TAMP assets have reached $255 billion, up 1,000% since 1887 and 25% since 2005 partly due to the addition of Prudential Financial’s assets into the TAMP category
  • Four leading TAMPs now each have access to over 18,000 financial advisors
  • The TAMP market is incredibly concentrated; the ten largest firms account for nearly all the assets

Product Segmentation
This section explains the product segmentation of the fee-accounts industry:

  • Almost three-quarters of the fee-account client assets of full-service brokers attending fee-account conferences are in separately managed accounts

Unified Managed Accounts

  • Unified managed accounts, as they are now, would represent less than 5% of the total assets under management if combined with separately managed accounts and multiple style portfolios
  • Unified managed accounts assets under management have increased over 75% since 2006 to $39 billion

Separately Managed Accounts

  • Over half of separately managed accounts’ new assets are new cash from IRA rollovers & others
  • Only 7% of fee-only financial advisors are utilizing separately managed accounts today
  • The average separately managed account is over $300,000, up substantially in the prior couple of years
  • Separately managed accounts net flows have reached $81 billion, up over 400% since 2001

Multiple Style Portfolios

  • The average account size of multiple style portfolios has risen to nearly $500,000, up 25% since 2004

Mutual Fund Wrap Accounts

  • The share of mutual fund sales captured by sub-advised funds is expected to increase
  • Mutual fund wrap account assets have grown to over $360 billion, an increase of almost 40% since 2005

Annuity Wrap Accounts

  • Most full-service brokers believe that annuities will not be crucial to their fee-accounts businesses due to inexplicably high costs of their clients

ETF Wrap Accounts

  • ETF wrap account programs may provide a better value, due to their elimination of both high management fees & tax inefficiencies

Broker Wrap Accounts

  • Full-service brokers have mixed views on broker wrap accounts, giving such an average score of 5.6

Fee-Based Brokerage Accounts

  • Fee-based accounts became illegal with the abolishing of the Merrill Lynch Rule in 2007

Markets & Distribution Channels
This section outlines fee-based brokerage accounts:

Direct Distribution

  • The assets in some of the discount firms are impressive enough to make TAMPs salivate
  • The Charles Schwab Corporation & Fidelity Investments lead the way in total assets per account

Financial Advisor Markets

  • There are nearly 96,000 reps in the independent broker/dealer industry, which has been fairly flat over the past four years
  • The number of fee-based financial advisors has been steadily increasing; there are about 19,500 now
  • Banks control about one-third of all consumer investable assets
  • Almost three-quarters of banks claim to offer broad separately managed accounts platforms
  • The largest insurance broker/dealers include AXA and New York Life, each with over 6,000 reps
  • There is some evidence that CPA firms are embracing separately managed accounts

Future Predictions for the Separately Managed Accounts & Other Packaged Fee-Account Programs Business
This section details future predictions for the rapidly growing fee-accounts business:

Substantial Expected Growth for Both the Packaged Fee-Accounts & Broader Fee-Accounts Markets

  • In total, the entire fee-accounts market should grow to nearly $16 trillion in 2012

Growth in Seven of the Eight Types of Fee-Account Programs

  • Assets in separately managed accounts will more than double over the next few years, reaching $2.8 trillion combined by 2012
  • Even excluding proprietary managers, the separately managed accounts market may still reach $2.0 trillion by 2012
  • The number of separately managed accounts are expected to exceed 16 million accounts in 2012
  • Multiple style portfolios may soon rival mutual fund wrap accounts in assets under management, as they are expected to surpass $500 billion in 2012
  • And adding fee-only financial advisors usage of ETFs to ETF wrap accounts, the projections are even higher; they may grow to $270 billion by 2012
  • Broker wrap account assets should surpass $200 billion by 2010, increasing sharply in the next two years due to displaced fee-based brokerage account assets

Emerging Distribution Opportunities

  • The wirehouses dominant share of fee-accounts assets is likely to drop off significantly as all other channels begin to catch up
  • Over $900 billion may be in advisory 401K accounts by 2012
  • The international separately managed accounts market may reach almost $400 billion by 2012

Expected Process Improvements

  • TAMPs will be the driver of a larger share of all fee-account assets, possibly reaching one-quarter or more of the market by 2010

To better understand the developments for Fee-Accounts, executives can purchase Tiburon's Separately Managed Accounts & Other Packaged Fee-Account Programs: Recasting a Growing Industry research report where the key findings highlighted above are covered in greater detail. Please contact Sarah Sage at SSage@TiburonAdvisors.Com or 415-789-2540.