SEI WRAPS IT UP AND SLUGS IT OUT WITH WIREHOUSES: TARGETS ADVISERS TO MIDDLE MARKET

SEI Investments used to be a company a-foundering.

Little known outside the wonky worlds of info-tech services and fund administration for banks — it got its start providing computer-based training simulations for loan officers — SEI stumbled through a beleaguered 12-year push into pension fund consulting before finally abandoning the effort in 1995.

A simultaneous foray into asset management, however, is starting to pay off. And Wall Street is taking notice: SEI’s stock price has doubled during the past six months to more than $40.

After spending millions to add staff, beef up computer systems, correct early service missteps and build its brand name by marketing its elite institutional heritage, the company now is one of the largest mutual fund wrap service providers to financial advisers.

It still has a long way to go. And competition for the business, in which investors buy a package of mutual funds and even stocks, is getting fiercer. But SEI has established itself as a serious contender in a market dominated by wirehouses, including Salomon Smith Barney Inc. and Merrill Lynch & Co.

Last year alone, SEI’s adviser assets — the company’s fastest-growing source of new money under management — more than doubled to $5.2 billion. It now manages money for 2,000 advisers, up from 1,200 in 1996.

In all, assets under management grew 33% last year to $32 billion — the rest of the money coming from bank trust departments, large pension funds and other institutional investors. That figure puts it among the top 100 money managers.

Meanwhile, revenues from the asset management business swelled 44% to $29 million in the third quarter — representing 39% of overall revenue for the period, the latest for which a business line breakdown is available.

stock follows suit

Wall Street is cheering.

“(The stock) has really followed the top line,” says Janney Montgomery Scott Inc. analyst Richard Jacobs, referring to the pickup in revenues in what are now SEI’s two core lines — information
technology and asset management.

Boosting the stock run: a $12 million update of its computer systems to help banks deal with their Year 2000 computer problems.

Also adding fuel: changing the company name from SEI Corp. (it stood for Simulated Environments Inc.) and spending $3 million to underwrite a critically acclaimed public television series called “Beyond Wall Street: The Art of Investing.”

“We could be in the cellular telephone business with a name like (SEI Corp.),” quips Carmen V. Romeo, the executive vice president who has led the company’s push to target advisers serving clients with at least $150,000 to invest.

Each month, SEI Investments lures them by the dozens to its new barnlike headquarters in the Philadelphia suburbs, making a pitch for its wrap program by stressing the disciplined approach that is tied to its institutional roots. The company polices style drift by monitoring fund trades daily.

“We make it a big deal for (advisers) to tell their clients that this is an institutional-caliber program and that is the cachet to it,” says Mr. Romeo.

Advisers can pick from a series of tax-efficient model portfolios created from a selection of 10 mutual funds managed by subadvisers ranging from Sanford C. Bernstein & Co. in New York to Credit Suisse Asset Management Ltd. in London.

“You can structure portfolios all day long, using funds sold through Schwab, for example, but if those fund managers deviate, you don’t have any control nor do you have anyone monitoring that,” says Brooks Larson, president of Adason Financial Advisers Inc. He has put tax-sensitive clients into the SEI program for his Bloomington, Minn.-based firm, which has $10 million under management.

Sold directly to advisers and through independent broker-dealers, the wrap also includes back-office services and sales and marketing support. Planners can turn over some or all of their assets to SEI, which rebalances each portfolio as needed.

The program has apparently struck a cho
rd with planners seeking to cut the amount of time they spend on clients who aren’t very rich and on retirement plans for small businesses.

SEI makes its money by taking a cut of the fund management fees it charges advisers, which range from 0.35% for fixed-income portfolios to 1.95% for international funds. By comparison, the average fee for open-end mutual funds is 1.25%, according to Lipper Analytical Services Inc. The company, according to Mr. Romeo, on average earns about 45 basis points on assets managed for advisers.

Today, SEI is the largest player among third-party vendors of mutual fund wraps, outstripping the likes of Donaldson Lufkin & Jenrette Securities Corp.’s Pershing division and Denver-based Portfolio Management Consultants Inc. (which recently acquired wrap player Adam Investment Services).

Cerulli Associates Inc. estimates that SEI has a 10% market share, although the Boston-based consultant cautions it is difficult to confirm numbers for third-party providers because of multiple relationships with clients and confidential customer lists.

Unlike the wirehouses that sell wrap programs directly to investors, third-party vendors hawk their programs to broker-dealers, non-affiliated advisers and bank trust departments, which in turn offer the services to their clients for a fee.

Wrap funds may not make sense for investors concerned about three or more layers of fees, but they are finding fans among consumers who like the idea of a personalized package of investments.

broker see, broker do

“As the smaller broker-dealers view the success wirehouse reps are having with wrap programs, that will serve as a catalyst for them to introduce their own programs, and third-party vendors are an efficient way to tackle that problem,” says Andrew Guillette, a consultant at Cerulli.

Still, SEI must contend not only with competition from large brokerages that have stronger brand names and massive internal sales forces, but with new competition from giants entering the exploding wrap mark
et, including Charles Schwab & Co. Schwab is setting up wrap fund marketing relationships with regional broker-dealers (InvestmentNews, Nov. 17).

Indeed, the industry’s biggest player, Smith Barney Consulting, which has $147 billion under management in its wrap programs and an estimated 19% market share in the mutual fund wrap sector, is making a massive push this year to train more of its 10,000 brokers to sell its wrap programs. Already, more than half do so.

“SEI knows they have to continue to invest in the (asset management) program at a high rate,” says Janney Montgomery’s Mr. Jacobs. “There is no shortage of competition in this business.”

In some cases, SEI has succeeded in winning back advisers who were turned off by poor service in its early days of developing its wrap programs.

Still, some of those who have come back remain a little skeptical.

“I had given them a bunch of business (five years ago) and nobody ever paid any attention to me,” says Richard Kesner, president of the Commonwealth Group Inc., based in Boca Raton, Fla. “Now they are paying attention.”