Although separately managed accounts (SMAs) have been around since the late 70s, the bulk of the attention from the industry has occurred primarily over the past decade-as a countermeasure for online trading in the mid-90s, and escalating during the market plunge of the early 2000s. Today, separate accounts sport a different look and feel today than they did even a couple of years ago.
Technology has increased the ease of incorporating separate account business into a practice, enabling greater access for independent advisors in the process. Not so long ago, independent RIAs had to practically clone themselves to do all the work necessary to include separate account business in their practices. Each part of the process had to be done individually, and the majority of those processes had to be implemented manually. Many invested their own money by hiring technology experts and creating, through trial and error, proprietary client profiling, asset allocation, manager databases, performance reporting and account monitoring systems.
We already know that advisors can gain access to prefabricated templates with the click of a mouse, customizing particular aspects of each part of the process according to their and their clients' needs. Getting started in the separate account business is now relatively easy-once an advisor knows where to go and the steps to get there.
But What Are Those Steps?
There's plenty of talk and reading materials on the benefits of doing SMA business, both to advisors and to their clients. But trying to find a step-by-step guide toward that end, or struggling through it alone, can paralyze otherwise self-starting advisors. An advisor can do his or her own research, and can talk with colleagues about their experiences in building an SMA practice. Inside knowledge gained by advisors who have mined the separate account field for years helps cut the learning curve short. This article will attempt to provide some pragmatic pointers for those who have been considering adding separate accounts to their slate of offerings, by sharing insights from successful advisors.
Here are just a few of the critical questions we will address: How can advisors find out about separate account platforms? What kind of questions should be asked in evaluating them? How does an advisor negotiate the best service from the platform chosen? How should advisors educate clients regarding the reasons for using separate accounts? Fielding Miller, CEO of CapTrust Financial Advisors in Raleigh, N.C.; Tom Carstens, a partner at Lenox Advisors in New York; Chris Jones, CFP, and Steve Coggins, partners at Jones Coggins & Co. in Wilmington, N.C.; and, Gary Bramon, CLU, ChFC at Alders Financial Solutions in Novato, Calif., offer their insights into the steps they would take if they were just beginning to incorporate separate accounts into their businesses today.
Manager Search Or Platform?
According to Coggins, the first step (after you decide to do your own search and evaluation) involves a change in mindset in selecting money managers. Miller agrees, and advises looking at the choice of money managers from the perspective of building a niche for your business. "In the life cycle of a money manager, the best performance typically occurs when managers are younger (not too young), their portfolios are not quite so large, and they're excited about managing money," he explains. "As they grow larger, they get to a point where that excitement turns into a search for relative performance. They want to keep the assets they've garnered, and they realize that if they turn in performance that's not too far off the benchmark, they'll be able to stick around."
Miller goes on to explain that by researching smaller, specialized managers-and only those who invest a significant portion of their own money in their portfolios-"All of a sudden, you have a theme to your business and a point of differentiation you can carry out into the market." It can be tricky to find such managers, but it can be done.
An entire volume can be written about doing manager searches, using software and available databases like Mobius' M-Search. But most will prefer to use a platform. Suggested steps include calling the managers themselves to get their recommendations on which platform to use. Of course, if an advisor has a broker-dealer that has developed its own platform or that has customized a third-party platform, all the advisor has to do is to plug into that system to get started. If the advisor has confidence in the due diligence and other services the broker-dealer provides, such plug-in style platforms can be the easiest and quickest way to gain access to everything needed.
Bramon employed this approach with LPL Financial Advisors' system, and has one piece of additional advice. "For advisors starting today, I would recommend opening their own account (with a money manager) first. I'm really a believer in not selling something that you don't own yourself. Although it may be impractical for advisors to open three or four different accounts of $100,000 each, most established advisors who are ready to do SMAs have enough personal assets to open at least one."
All advisors interviewed for this article unequivocally advised starting with only one platform. Carstens explains, "Starting out with more than one platform only muddies the waters and makes it very difficult for you to measure your success. Once you develop a comfort level and a good relationship with the first one, you can spread your wings a little and add a second."
Finding a list of platforms is simple. Doing a little research on Web sites for research companies such as Cerulli Associates or Tiburon Strategic Advisors, reading industry trade magazines, consulting friends about the platforms they use, or just using the platform provided by a broker-dealer will yield lists appropriate for advisors' business objectives.