Industry voice refines its timbre with the times

Market volatility and favorable demographics may be most responsible for the rapid rise of separately managed accounts. But the managed-account industry’s trade group also is getting a lot of credit – along with some heat.

Some maintain that it isn’t yet clear whether the five-year-old Money Management Institute in Washington has balanced power internally between sponsor firms and the asset-management community.

There is also a concern that some smaller constituents, such as regional broker-dealer sponsor firms, are underrepresented on boards and within the MMI’s membership.

But few would deny that the institute has become an effective profile raiser, cheerleader and lobbyist for the $319 billion industry. Some members are even eager to see the institute play a yet broader role.

“It has been absolutely critical in bringing together existing participants in the industry, as well as those considering entry or just entering,” says Kevin Keefe, vice president and senior consultant for Financial Research Corp. in Boston.

New phenomenon

Whatever concerns exist about the MMI today, they pale in comparison with the relatively bleak prospects that the group faced in late 1997, when it succeeded the Wrap Industry Association.

Back then, wrap accounts – the predecessors to separately managed accounts – weren’t faring well in their struggle for legitimacy.

Senior managed-account executives recruited Christopher L. Davis, a lawyer, to lead the group. He’d previously headed the Investment Program Association in Washington, which represents primarily limited partnerships and non-traded real estate investment trusts.

“There always had been some confusion in the media and among regulators, because [separately managed accounts] were a fairly new phenomenon,” says one of the executives, Peter F. Muratore, the retired president of Oppenheimer Capital Distributors, the New York-based value investing arm of Pimco Advisors.

“It’s easy to drop this industry into the mutual funds bucket and just think of it as mutual funds,” says Mr. Muratore, MMI’s chairman.

He and others looked to, among other models, the Securities Industry Association, which represents the brokerage industry, and the Investment Company Institute, the mutual fund industry’s trade organization.

“The task we looked at was building a forum that would bring major money managers and distributors and sponsors together, where they’d feel at ease to talk across the table about problems and solutions,” Mr. Muratore says.

“We wanted to give the opportunity for cross-training and to be able to speak to regulators and media as a group, and to better define what the separate-account business was.”

As executive director, Mr. Davis says his initial priority was to address “a couple of regulatory issues that had been bedeviling the industry.”

The first goal – which the MMI achieved – was to gain exemptive relief from the 1940 federal law that regulates the mutual fund industry.

The second issue was to cut red tape for account managers. In 1999, the institute convinced the Securities and Exchange Commission to free managers of the task of sending paper trade confirmations to clients who elected not to receive them.

Protecting to promoting

“It was a nuisance to the investor, and it kind of conflicts with the long-term focus of managed accounts and the [image] of professional money management,” Mr. Davis says.

Once those obstacles were cleared, Mr. Davis says, the MMI was able to focus more attention on recruiting new members and raising the industry’s profile.

“It allowed us to swing over from the `protect’ to the `promote’ part of our agenda,” he says.

In promote mode, the MMI has functioned largely as other trade groups do, sponsoring industrywide conferences, keeping its finger in matters on Capitol Hill and lobbying the media for attention.

Some in the managed-account industry would like to see the MMI’s role expand to something closer to that of the National Securities Clearing Corp., which has brought many of the same cost- and risk-cutting features that it pioneered in the stock and bond markets to the mutual fund industry.

“At the end of the day, [the MMI] is a first-class organization with experienced, knowledgeable, senior executives from across the entire industry,” says Peter Cieszko, managing director and head of the U.S. retail and high-net-worth business for Citigroup Asset Management in Stamford, Conn.

Through formal and informal mechanisms, the MMI has become a sounding board where management firms, wirehouses and others in the business hammer out stances, standards and boundaries for a business that has developed a substantial footprint in the financial services industry.

“The institute has created an important medium for the sharing of successes, failures, challenges and direction,” Mr. Keefe adds.

For his part, Mr. Davis points to a Deloitte & Touche LLP study of the industry’s infrastructure as the first step in a gradual process toward an operating model that may or may not go in the direction of the National Securities Clearing Corp.’s.

Mr. Cieszko, however, doesn’t favor the NSCC-type approach for the managed-accounts industry.

“It would be crossing over into a for-profit business that then has its own agendas,” he says. “As an independent trade organization, you can’t be completely objective in running a for-profit business.”

Rising status

The institute’s increasingly popular annual meeting evidences the group’s growing influence.

Two years ago, about 150 attended; last year, about 400 showed up, says FRC’s Mr. Keefe.

This year, as many as 500 people are expected to attend the annual meeting (being held today through Wednesday in New York).

Those in the mainstream business media as well as the trade media have begun to recognize the growth and rising status of separately managed accounts and their differences from mutual funds, Mr. Davis says.

“The growing sophistication of questions from the media tells me that we must be doing something right in reaching out and supporting informed coverage,” he says.

Now, the MMI is implementing or hatching a number of initiatives aimed at building on the industry’s hard-won legitimacy, including:

* Its first reporting of all assets under management in the industry, based on a just-completed analysis of fourth-quarter numbers. The institute had been publishing only quarterly numbers from a sampling of the industry’s five largest sponsors.

“This will be the most encompassing accounting of the status of the industry because we’re talking to all money managers who have assets [in it], rather than just a sampling,” Mr. Muratore says.

* Its first technology seminar, which is scheduled for October. “It’ll be the kind of information we’ll bring to the membership that we don’t think they’ll be able to get any other way,” Mr. Muratore says.

* A Deloitte & Touche study that will make recommendations for improving the industry’s infrastructure in a report due around the end of May.

“Is the current infrastructure that supports the operational capability of doing the managed-accounts business adequate to sustain continued growth?” Mr. Davis asks.

“There is a fast-building consensus that it isn’t … Managed accounts grew as a cottage industry, and the capabilities that exist now to link sponsors, informational interfaces between sponsors and managers, while adequate today, won’t be adequate tomorrow.

“We want to capture that, maintain momentum on the consensus and then work on and toward an implementation,” he says.

Anticipating criticism that such an implementation might elevate the MMI’s role, Mr. Davis says, “We’re not embarking on this with an eye toward saying, `We have to own the solution or be the solution.’ We’ll find a solution and then, hopefully, we’ll be mature and professional enough to suggest it, whatever it is.”