The global economic crisis could turn out to be a blessing in disguise for the ever-expanding managed-accounts industry.
The industry suffered right along with the rest of the world during the past year, but it is now riding high on expectations of a renewed emphasis on investment strategies over specific investment products.
“The starting point used to be at the investment product. But that's not the driver anymore, and we're seeing the focus shifting toward portfolio strategies,” said Mark Schoenbeck, chief marketing officer of Genworth Financial Wealth Management Inc. in Pleasant Hill, Calif.
The general shift away from products toward a broader investment process plays right into the hands of firms such as Genworth, which operates a $15 billion platform that allows financial advisers to build customized portfolios for their clients.
The managed-accounts industry is a broad market that includes separately managed accounts, mutual fund wrap accounts and representative-managed accounts, as well as unified managed accounts, which combine multiple investments and strategies.
Total industry assets at the end of March had declined 29.5%, to $1.2 trillion, from $1.7 trillion a year -earlier, according to Dover Financial Research, a Westwood, Mass.-based consulting firm. During the first quarter this year, industrywide assets fell 7%, to $1.2 trillion, from $1.3 trillion a year earlier.
Most industry representatives, from platform providers to asset managers and consultants, are essentially shrugging off the declines as unavoidable in this environment.
The emphasis now is on how well the table has been set for a managed-accounts industry revival.
“Investors know they need help with the devastation in their account values, and as they question their financial security,” said J. Gibson Watson III, president of Prima Capital Holding Inc., a Denver research firm.
“Individual investment product sales will be challenged, but holistic portfolio advice will have an opportunity,” he said. “It will be very difficult for an adviser to recommend or sell an individual product based on performance alone, due to the market declines of 2008.”
The managed-accounts industry is rarely measured by investment performance because it is difficult to accurately track the performance of tens of thousands of individual accounts, made up of everything from stocks and bonds to mutual funds, closed-end funds and exchange traded funds.
A rough calculation by the Money Management Institute in Washington showed that separately managed accounts and mutual fund wrap accounts outperformed the Standard & Poor's 500 stock index during each of the past nine quarters, dating back to the start of 2007.
In the first quarter of last year, for example, when the S&P 500 was down 10%, SMAs were down an average of 6%, and mutual fund wraps were down by an average of 1%.
In the fourth quarter, when the S&P 500 lost 22%, SMAs were down 17%, and mutual fund wraps lost 13%.
The fact that mutual fund wrap accounts consistently outperformed SMAs during the period was attributed to broader exposure to fixed income, international markets and some alternatives.
“It shows that if advisers use the advisory process the way it's meant to be used, managed solutions absolutely add value and have a position in the future,” said Jean Sullivan, principal of Dover Financial Research of Westwood, Mass.
The general movement toward advice and strategies over products is also expected to pave the way for a strong emergence of the UMA model, which has yet to gain a lot of traction, despite years of industry hype.
UMA assets represent just $44.1 billion, or 3.6%, of total managed-account assets. But UMA assets did increase by 15.6% over the one-year period ended March 31, representing the only managed-account-industry category to increase assets during the period.
The managed-accounts industry, 63% of which is concentrated among the major brokerage firms, could start launching UMA platforms as many of the largest banks and brokerage firms merge and consolidate operations.
“All the mergers going on right now will mean a lot of collapsing of platforms, and that affects most of the large platforms,” said Matt Witkos, president of Eaton Vance Distributors Inc., a Boston-based firm with $126 billion under management.
“With consolidation, they have to create new platforms anyway, so the UMAs become the foundation,” he said. “I think advisers will be using these new platforms in a different way, and the more sophisticated advisers will want to pull all the levers to find best fits for their clients.”
Beyond the growing thirst for advice and portfolio strategies, and the momentum behind the UMA platform model, the managed- accounts industry plans to market aggressively two of its strongest assets: transparency and liquidity.
“If [Bernard] Madoff was a manager on an SMA platform, the fraud would have been uncovered years ago,” said R. Mark Pennington, partner and director at Lord Abbett & Co. LLC, a Jersey City, N.J.-based firm that manages $13 billion. “In the SMA world, not only is due diligence done [on money managers] at the sponsor firm level, but the assets are custodied there as well.”
Liquidity, a staple of the managed-accounts industry, might have contributed to some of the recent outflows, according to John Morris, chief executive of Clearbrook Financial LLC, a Princeton, N.J., firm with $35 billion under advisement.
“The challenge for managed accounts over the past nine months has been market-related because the industry suffered from the lack of liquidity in other products,” he said. “When people were getting hurt in other vehicles, they had to go to managed accounts where they had some liquidity.”
But as the market cycle progresses and conditions improve, Mr. Morris said, “investors will be much more comfortable in managed ac-counts, versus other less transparent and less liquid investments.”
E-mail Jeff Benjamin at [email protected].
