Is there a "Pepsi-Cola" ready to knock off the Cokes in this business?
    Launched over a decade ago, the purpose of the Money Management Institute (MMI) is to serve as a national forum for portfolio management firms and sponsors of investment consulting programs. Since that time, it has become the national barometer of the managed account industry. That industry seems to be at a crucial point in its development, and the MMI's most recent conference in Philadelphia reflected a corresponding change in focus at the organization. To delve further into those changes and the reasons for them we talked to Steve Gresham, executive vice president of Phoenix Investment Partners Ltd., and also a member of the MMI Board of Governors, who gave the keynote speech kicking off the day-and-a-half session.

    FA: Steve, what was the most notable difference about this conference compared to previous conferences, and what does it tell us about the separate account industry and the new focus of the MMI?
    Gresham: The objective of my opening presentation was to throw out the challenge of whether the glass is half empty or half full relative to the challenges of the industry today. The goal was to get the members to think outside the four walls of the separately managed account industry and, instead, to think about how SMAs can deliver solutions from the client perspective. The entire conference took on more of a consumer orientation rather than an industry-centric orientation.

    FA: What's the instigator of this shift in orientation?
    Gresham: The primary instigator is the baby boomer generation and its effect as an economic tsunami that has rolled right over many, many industries and companies in the past, and that is now threatening to roll over the asset management industry. For example, the baby boomers practically wiped out the U. S. automobile industry in the early 1980s. That industry had become focused entirely on its own game plan and not on the experience of the consumer. With the boomer generation, any company or industry that does not manage its business backwards from the consumer experience will go out of business.
    In the separate account industry, an awful lot of positive inertia has been built up among money managers. Currently, it's pretty easy for these managers to say, "We've accumulated assets under management and we're in pretty good shape, so we can just kind of drift." That's not much different from the way General Motors was approaching their market in the 1980s.

    FA: Tell us more about the GM approach.
    Gresham: In that period, GM was focused on the generation prior to the boomers. That was the World War II generation that Tom Brokaw wrote about in his book, The Greatest Generation. The government gave them a social safety net-the New Deal-which pulled them up out of the dumps. Then our national sovereignty was threatened by World War II.
    You know, I was sitting in the middle of New York City on 9/11 and I never thought we were being invaded.. But the WWII generation saw a German U-boat land on Long Island and the attack on Pearl Harbor, and they built a loyalty and confidence together that's simply not present in the baby boomer generation. Nearly all the boomers were born after WWII and it's this generation that began to unwrap the entire value proposition of the government and big companies.
    If an advisor asks the top ten households in his book today what he can do for them and why they're working with him, he'll get a very different answer from them than if he asked people who were born in the 1930s. The older generation benefited from working with the government and with the big companies. As my friend Frank Campanale, from Detroit, has told me, even the car industry had a socio-economic buy a Chevrolet, graduate to a Buick when you got that first big promotion, then to an Oldsmobile, and then, for a rarefied few, to a Cadillac. But the planned obsolescence GM set up for that generation to promulgate its own success didn't work for the boomer generation. Boomers are much more interested in the experience that car can give them rather than following a socio-economic progression. GM and the entire automobile industry fell into the hands of the boomer generation looking around the lot in the 1980s and saying, "You're not listening to me. You're company is not in sync with me. All you have are bench seats and trucks, no SUVs or minivans. Nothing for the big family I've got here."

    FA: Steve, how does that translate to the separate account industry?
    Gresham: The industry is in danger of falling victim to the same risks faced by U.S. automakers in the 1980s-it's in danger of focusing on its own promulgation and not the perspective of the boomer generation that is looking for a great experience. As a result, people are beginning to "walk." They're voting with their feet. This is something the sponsor-side of the industry should look at very carefully. There's been a dramatic increase in the sale of asset allocation funds, half of which are to the direct providers. I believe Fidelity and Schwab each brought in more new money last year than the big wirehouses. And just like every other industry the boomers have influenced, the big, traditional firm advantage is going to run off a lot faster than the firms realize. Why would anyone coming up today aspire to own a separately managed account if it doesn't give decent performance? It's that question that points back to the whole mission of the MMI.

    FA: Which means...
    Gresham: Which means we need to confirm our mission. Is it to defend a particular product structure that is based on the same concept as Coca-Cola's attempt in the 1940s to maintain its allegiance to a six-ounce glass bottle instead of the quality of its product? You know, Coke was able to do that for a short time, then this upstart Pepsi came along and said, "We'll give you twice as much for the same price." Think about how that translates to the investment management business. Is there a Pepsi-Cola in its future? The answer is there's a Pepsi-Cola in its present.
    If we have even a "normal" return environment, in which the long-term return of the S&P 500 maintains its 10% average rate, there is really very little margin for error by the investment management industry. Inflation and fees eat away at the return, which suddenly becomes single digit and probably a lot less than the boomer client expected. In the search for higher returns in a lower return environment, fees stand out. Our Phoenix Wealth Management Survey has confirmed the rising importance of fees, now a primary reason these households are seeking new advisors. When backed to the retirement "wall," boomers will be as unforgiving with investment managers and advisors as they have been with automakers and retailers that didn't acknowledge their preferences. It is imperative we discover and proclaim our added value, in all parts of the industry-investment manager, program sponsor, technology vendor and, most importantly, financial advisor. 

    FA: So it's too late for the investment management industry?
    Gresham: If all an advisor or firm does is help people with their investments, the increase in sales of allocation funds alone should give them pause to consider whether that value proposition is in fact one that is shared by the client. This guidance was given to an audience at the MMI conference of which two-thirds were money managers and the other third were sponsors and technology people. So those industry leaders heard where adjustments needed to be made and also how it has to be made in support of the frontline people, the advisors.

    FA: So what's next for the industry as a whole?   
    Gresham: Divide the industry into three parts-investment managers, advisory firms and technology providers. These three players partnered to create the modern SMA industry. It only makes sense that the next level of success is achieved through their combined efforts. And common to each industry segment is the need to support the quality financial advisor, who occupies the front line in the battle to help clients.
    Take the advisory firms. The issue for the wirehouse brokerage firms, for example, is that they are in part trapped by the profitability and the loyalty of their current clientele. Just as the average age of Buick and Cadillac buyers began creeping up in the 1980s as the boomers shunned those brands, the wires and other advisory firms are  not fully recognizing that their average client age continues to rise. Another trap is that the current clientele is quite satisfied with the service, making it difficult to motivate the broader firm to change in order to attract the boomers. It's not so much that the boomers want very different services than their parents, they are simply much younger and facing more substantial financial challenges. 
    It's easier to see the changing roles of all three groups by examining the managed account consulting process, which includes the interview process at the account's inception to establish the goals and framework, the universe of investment selections, how you organize those investments in a solution for the client and then the monitoring, rebalancing and reporting. For the boomer generation, you have to go back and revisit that entire structure and make the front end much, much more robust-that's the job of the advisors and the advisory firms. The interview process has to include lots of preferences and issues other than just investments. You have to expand the entire group of available products to go far beyond investments. And then you have to organize them around the client's life issues instead of an account statement. If you do all that, you end up looking at a balance sheet and deciding what can be done to help with the risk and liabilities. The reporting has more to do with life goals and not just whether we've gotten you to a million bucks yet. Technology providers will facilitate the blending of client preferences and aggregate the information necessary for both better account instructions and more effective monitoring of assets. Finally, investments managers will provide more absolute return strategies and more precise products-many with guarantees-to improve the chances of achieving success. Whereas in the past the industry competed on the basis of packaging products, we now join together to better package a more reliable process.
    That's where we are now-it's more of a financial planning process where a great efficiency can be created with better packaging. It has to become more about the client's life than about their percentage returns.

    FA: Thanks for your insights, Steve.
    Gresham: You're welcome, Sydney.