Assets in broker-managed ac-counts reached the levels of traditional wrap fee accounts in the first quarter of the year, a milestone in the fee-based business at major brokerage firms.
Wrap, or separately managed, accounts are run by third-party managers. They have been a staple at the wirehouses since the mid-1970s and for years have been the dominant part of the fee-based industry.
In recent years, however, SMAs have been losing ground to other fee-based platforms, and the market drop has accelerated the trend.
Through March 31, broker-managed fee accounts, including both discretionary and non-discretionary accounts, reached $454.6 billion in assets — nearly identical to the $459.9 billion in traditional SMAs, according to Cerulli Associates Inc. of Boston.
What's more, mutual fund wrap programs are also coming up fast, with $368 billion in assets.
In all likelihood, broker-run fee-based platforms will overtake traditional wrap accounts for good.
In what Cerulli calls “rep-as-portfolio-manager” accounts, or programs where brokers have discretion over client investments, assets grew 3.9% in the first quarter. That compares with a drop of 11.6% in traditional wrap programs and a loss of 6.4% among all types of fee-based accounts.
Over the past two years, assets are up 3.5% in adviser-run discretionary accounts, while traditional wrap assets have lost 47% of their assets.
Most of the SMA losses have stemmed from the decline in asset values, but the programs have also experienced negative cash flows as well.
“We've always thought SMAs were going to slow down” in favor of more flexible, cheaper alternatives, said Alois Pirker, a senior analyst at consultant Aite Group LLC in Boston.
“The current crisis has accelerated that,” he said.
With the reversal of the so-called Merrill Lynch rule — the rule that exempted fee-based brokerage programs from the Investment Advisers Act of 1940 — more brokers have become registered as investment adviser representatives, said Len Reinhart, president of Reinhart Consulting Group LLC in West Chester, Pa.
Together with improvements in broker-managed platforms, the larger population of users has driven growth in adviser-run portfolios, he said.
“You're really seeing a transition to fee-based business from traditional commission accounts,” Mr. Reinhart said.
BLEEDING ACCELERATED
Traditional wrap accounts have provided no shelter in the storm.
Clients tend to be concentrated in a few managers. And those managers themselves might occupy a niche, said Jeff Strange, a senior analyst at Cerulli.
So “I think there's a [diversification] risk there that's not fully appreciated by advisers or clients,” Mr. Strange said.
“If you have unlimited funds, you can create a very nice allocation” with SMAs, said a broker at Morgan Stanley of New York, who asked not to be identified.
“If not, you're better off using an ETF model [portfolio],” the broker said.
“We've done substantially better than the market and almost any manager I've seen,” said a legacy Wachovia Securities LLC broker at
Wells Fargo Advisors of St. Louis, who uses the firm's discretionary program and also asked not to be identified.
“We like it because we stay in touch with what's going on” in the portfolio, the
Wells Fargo rep said. “All these guys who park money with money managers lose touch,” which opens them up to questions about fees, this broker said.
In recent months, the inability of traditional SMAs to go to cash has accelerated the drain.
The programs “are definitely losing assets [because] money managers last year didn't add any value,” said another
Wells Fargo Advisors broker, also a legacy Wachovia Securities rep, who asked not to be identified.
Third-party SMA managers stay fully invested for the most part, this broker said. “The amount of cash is up to me — I have to pull it out and put it on the sideline,” the broker said.
Even before the crash, advisers recognized the shortcomings of managed accounts and gravitated toward self-managed choices that allow clients to diversify with mutual funds and exchange traded funds.
“[SMAs are] not very conducive to panicked clients and rapid changes in markets,” Mr. Strange said.
From 2005 to 2008, discretionary rep-as-portfolio-manager programs doubled their use of mutual funds and ETFs, Mr. Strange said, from about 7% of assets to 14%.
Broker-run accounts tend to be more conservative than typical SMA portfolios because of the ability to use funds and bonds, the Morgan Stanley rep said.
“You can take the full portfolio and put 40% into fixed income,” this broker said.
Broker-run portfolios of course aren't the answer for every broker or client.
Sponsors need to be careful about which brokers they let into their various programs, Mr. Strange said, “and make sure the rep has the ability to take discretion in a portfolio manager role.”
E-mail Dan Jamieson at [email protected].
