Third-party separate account consultant programmes in the United States have grown at a compound annual rate of 15.9% since 1997, and now represent $346.0 billion in assets, with proprietary manager offerings accounting for another $104 billion. These are among the findings of the latest quantitative analysis of the managed accounts market in the US by Cerulli Associates, the Boston-based mutual fund management consultants.
Cerulli says the growth of the sector has been driven by programme sponsors large and small. Top sponsors such as Merrill Lynch and DB Alex Brown have expanded their asset base faster than the rest of the industry, while firms farther down the league tables – such as Bank of America, London Pacific Advisors, and Pershing, the last two coming from the third-party vendor segment – have also experienced significant growth. Cerulli says that every firm offering separate accounts from a proprietary asset management unit increased the share of assets managed by the internal group (in comparison to assets under management with third-party managers), except Citigroup (Smith Barney).
In a period in which mutual funds have been under fire by regulators for high expenses, the costs of layering an advisory fee on top of retail share classes with expenses of 1.20% to 1.30% may prove unappealing to investors, says Cerulli. Many mutual fund advisory programme sponsors make use of fund companies retail share classes on a load-waived basis, adding a programme fee of roughly 1.15% to the underlying expense ratios that averaged 1.22% at the end of 2003 (on an asset-weighted basis, according to data from Strategic Insight). Some firms have avoided this problem of high fees by using an asset managers institutional share classes (with lower expenses) in advisory programs.
Cerulli points out that other sponsors create special mutual funds just for the advisory programme that have lower expenses. Often, these fund are sub-advised by outside asset managers. Although the utility of the mutual fund has made advisory services available at very low account balances, the expenses associated with some mutual fund advisory programmes may lead investors to seek cheaper, non-advisory solutions, or select investment vehicles with lower expenses, such as exchange-traded funds (ETFs).
Cerulli says that executives in charge of RPM programmes have conveyed the need for advisors to know their own investment specialities and have the self-awareness to understand when other professionally managed investment products should be used. This is cited as a key attribute of successful advisors in RPM programs that maintain long-term client relationships, and Cerulli says it represents opportunities for asset gathering in mutual fund advisory or separate account programs to round out RPM portfolio strategies.
Importantly, Cerulli reckons managed accounts will no longer solely be the domain of five New York-based brokerage organizations. For starters, Richmond, Virginia is now one of the industrys centres of influence, following the completed merger of the brokerage forces from Wachovia Securities and Prudential. This merger also abruptly made the managed account group formerly serving the Prudential salesforce into a full-fledged third-party vendor, shaking up an already dynamic landscape among third-party managed account providers (although the Wachovia assets still account for the vast majority of Prudential Invetsments managed account assets under management).
Regarding third-party vendors, a number of recent acquisitions within this group has shown the bets that some of the fund management industrys largest service companies are making that managed accounts are a desirable component of the business. In addition, high-end private client group firms, such as private banks, trust companies, and high-end brokerage forces, are beginning to access managed accounts.