Size Matters 2003Size Matters 2003

David A. Gaffen

For the past several years, separately managed accounts have been among the fastest growing investment vehicles. But the bear market caught up with SMAs in 2002, when assets in managed accounts dropped by $20 billion to $752 billion.

The SMA business is still dominated by the likes of Merrill Lynch and Smith Barney, because the firms have been particularly adept at introducing the concept to their high-net-worth clients. Often, the minimum investment in an SMA is $100,000.

Increasingly, however, the managed account phenomenon is coming within reach of smaller investors and advisors who aren't connected to major wirehouses. For example, new platforms from Curian Capital and FolioFN have made it possible to reduce the minimum to as little as $25,000. And GE Private Asset Management has introduced a separately managed account program that has a $50,000 minimum.

Another piece of encouraging news for advisors considering the SMA route is the incentives some of these players are offering. Curian, for example, has come up with a fee-advance program based on a multiple of the asset fee it usually charges. For example, a 1 percent fee on a $100,000 would get a $2,400 payment from Curian in the first year, with subsequent fees gradually winding downward.

“People don't go for a fee-based business for anything but practical reasons, despite anything the ivory-tower executives are thinking,” says Chip Roame, managing principal at Tiberon Strategic Advisors in Tiberon, Calif.

This is why the major wirehouses offer an additional three to six percentage points on the payout grid for selling annuitized products — it helps smooth out the firm's revenue as well as the brokers.

Curian ultimately makes back the fee they advance the advisor if the producer continues to use the firm's programs for the next several years. “It'll be interesting to see if they get seasoned producers or neophytes going after the advanced pay,” says Chris Davis, executive director of the Money Management Institute in Washington. “If times get tough, do those producers bolt?”

Relatively Resplendent

Last year managed account growth dipped for the first time in seven years, but it still is having a great run, relative to long-term mutual funds. Managed accounts, once just 6% the size of the long-term fund market, have grown to a 19% share of investor assets.