No matter what the name, multiple-discipline accounts or products-known as MDAs or MDPs-are all the rage in separately managed accounts these days.

With the resounding success that Salomon Smith Barney (SSB) had marketing these products in 2001-more than 50% of its separately managed account (SMA) assets were in these products-it seems every firm with any SMA aspirations is studying how to get in the MDA game.

AMG, an investment company that holds significant equity in independent money managers such as Rorer and Tweedy, Browne, has announced a new affiliated product; SSB is bringing out its new proprietary program; and Merrill Lynch is burning the midnight oil developing its MDA solution. Countless other investment managers have inquired about the details of participating in or developing a multiple-discipline SMA product.

MDAs Today

A multiple-discipline product offers investors an actively managed core investment portfolio with all the benefits of traditional SMAs, which includes direct security ownership, customization, manager due diligence and enhanced reporting.

While traditional SMA mandates cover a finite piece of the investment universe, such as large-cap growth U.S. equities, MDAs provide one-stop access to a broad swath of investments. MDAs usually cover an entire capitalization or style category in one separately managed account vehicle. Most MDAs contain at least three distinct sub-portfolios, or "sleeves," covering specific investment groups.

For example, "U.S. Equity-Large Cap" is one of six strategies the SSB Consulting Group offers through its new MDA program. The strategy will cover large-cap growth, large-cap value and the large-cap blend investments. Its other MDAs follow core portfolio themes such as "Global Balanced."

With investment minimums as low as $150,000, multiple-discipline products offer the benefits of owning three or more traditional separately managed accounts with as little as $50,000 allocated to each sub-portfolio. MDAs have met one major challenge that SMAs faced in prospecting for lower-end investors: the challenge of diversification.

MDA Management

MDA management has evolved since the accounts were introduced. MDAs started as self-contained accounts in which packaging and portfolio managers came exclusively from the sponsor. In the second generation of the accounts, the sponsor still does the packaging, but for each MDA hires one external investment-management firm with multiple portfolio managers. The difference between the second and third generations is that in the latter, the sponsor works with portfolio managers from various investment-management firms for each MDA.

The individual sub-portfolio sleeves of MDAs are discreet investment portfolios with managers assigned to each sleeve who are responsible only for handling their particular portion of the overall portfolio. For instance, in the "U.S. Equity-Large Cap" offering from SSB, the sleeves are Large Value, Large Growth and Large Blend.

To combat potential "wash sale" issues-such as one manager buying a security from another within the MDA-firms like SSB designate one manager to oversee the entire MDA investment strategy. This overlay portfolio manager typically does most of the heavy lifting for the MDA and reviews and executes aggregate trades for all the portfolio managers running money in a particular MDA. Typically, the individual portfolio managers do not have access to the holdings of the other portfolios, so the overlay portfolio manager serves an important role in maximizing tax-related issues.

The Future

The fourth generation is already in development, although no MDA with these characteristics is in the marketplace yet. With this variation, the sponsor would do packaging, but could leave some asset allocation and ultimate portfolio-management selection to the financial advisor. The vision is that each MDA would use multiple external investment-management firms and the advisor would pick from a short list of names for each piece of the MDA asset-allocation pie. The advisor also might be able to vary the asset allocation a bit.

Important Considerations

MDAs clearly are filling a void in the product matrix of major distribution firms, providing a fee-based solution for clients and intermediaries when both otherwise might have to settle for more traditional retail investment products like mutual funds. The introduction of SMA products to these audiences poses some interesting challenges, including asset retention and the MDA sales process.

The most important reality of the MDA with which firms must become comfortable will be the lower asset-retention characteristics of these products vs. traditional SMAs. The main reason SMA assets are attractive to investment firms, despite fees as low as 35 to 38 basis points annually, is their historically low annual turnover rates, which have been estimated at as low as 10%. Investment managers have been able to make the slim financials on traditional SMAs work because of the incredibly long time investors hold on to them.

But for a firm to develop or participate in an MDA, the planning and decision-making process must assume these products will have retention rates that will likely mirror the three- to four-year period we see in the mutual fund world today, not the more favorable retention characteristics of current SMAs.

The packaging of MDAs that makes them more attractive and appropriate for lower-level investors could be seen as threatening by the very intermediaries who consider these products for their clients. With manager screening and selection and the asset-allocation mix of multiple managers done by the MDA sponsor, where is there sufficient room for an intermediary to add value to the sales process?

We believe that many mid-level advisors at major distributors will perceive the MDA as a real threat to their livelihood. As these products become more like turnkey asset-management solutions for lower-level clients, advisors will push back. In a replay of the asset-allocation mutual fund evolution, MDAs may ultimately find limited appeal in more direct distribution channels, including retirement-plan accounts.

Consider the difficult dilemma faced by significant mutual fund investment managers. Firms have the choice of (a) losing fund assets they are managing for 70 to 80 basis points annually to MDAs or (b) participating in an MDA with the opportunity to keep assets that would otherwise be lost, but incurring greater expenses and generating lower fees in the 35- to 38-basis point range.

Although the MDA's future is unclear, we would suggest that distributors (and advisors) have the most to gain from this product's success, followed by individual investors. Last on the list of stakeholders to benefit would seem to be investment-management firms.

Kevin Keefe is a chartered financial analyst with Boston-based Financial Research Corp. A financial services research and consulting firm, FRC specializes in competitive intelligence and analytical services for industry professionals.

A New Tool In The Planning And Consulting Process

Using multiple-discipline accounts (MDAs) as a legitimate tool in the consulting process-rather than a "one-fell-swoop" generic answer to all individual investors' managed account needs-can help solidify relationships.

According to Mike Hogan, executive vice president, managed accounts for PIMCO/Allianz Investments (PAI), "The multi-discipline concept has been around for years, especially in the form of global balanced managers," he says. "So it's really not a new thing, but the industry today has brought whole portfolios under one roof so the client has one snapshot portfolio."

PAI calls its version a Multi-Discipline Portfolio (MDP). This product offers access to its institutional investment firms of Allianz AG-including PIMCO, Nicholas Applegate, Oppenheimer Capital, Dresdner RCM, PIMCO Equity Advisors and NFJ-and is available in more than 35 customized portfolios. "There are companies out there who will say they can do an MDA and give you a growth manager and a value manager, but both managers will be from the same company," says Hogan. "The advantage of multi-discipline is its proper diversification and objectivity. If you only combine a growth and value style of a manager from the same company and your large-cap growth manager blows up, how can the advisor fire one side of the same company?" asks Hogan.

"One thing the industry has discovered is that a lot of new consultants may hand clients a profile and tell them, 'I'm advising you what to do, you pick the manager you feel comfortable with, and I'll build the asset allocation,'" Hogan adds. Most clients, however, he says, will tend to pick the managers with the best performance for the recent year-after which that manager's performance cycle might ebb and other style managers whose performance had been poor might improve. "For example," says Hogan, "growth managers delivered hot numbers in '97, '98 and '99. Individual investors followed them into 2000 and 2001 because they were looking in the rearview mirror. After '99, the growth market fell out of bed, and fixed income and value came alive." Sponsors recognize this problem and feel that multiple-discipline products can help push advisors and clients in the right direction.

2010: A Managed Account Odyssey

Here's a snapshot of what the future may hold for the industry.

The phenomenal growth of the managed money industry in recent years, combined with rapid technological advances, has found the entire financial industry at a crossroads. Managed accounts is an industry whose time indeed has come, as shown by the recent treatise, "2010: A Managed Account Odyssey," written by Leonard A. Reinhart, chairman and CEO of The Lockwood Family of Cos., and Jay N. Whipple III, chairman of Osprey Partners, LLC.

Managed account assets have reached approximately $417 billion. The Money Management Institute (MMI) says the industry has grown by 33% over the past four years, compared with a 15% growth rate for mutual funds.

In the 52-page report, Reinhart compares the development of the managed account industry with the growth of the mutual fund business in the 1990s. Mutual fund wraps were designed using a very similar method, but with only a one-product solution. The consulting process has broadened on the separate account side (called individually managed accounts in the paper) into a multiple-product solution set, and that's a direct result of its adoption at the firm level. Firms will take more control over the next few years, and separate accounts will become part of the cache of solutions, including financial and estate planning.

That the separate account indeed is a product is a key point in the paper. Viewing these accounts from this standpoint creates unlimited manufacturing and distribution possibilities, allowing them to be plugged into a variety of front-end processes. Technological development over the past few years has allowed full customization of separate accounts. This development, coupled with the lack of investor education, has created a recent awareness of these accounts, although they have been around for more than 25 years.

Education of advisors and the media also needs to expand for the industry to grow past the cottage phase into a branded entity, the report maintains. Ironically, the mutual fund industry, with its established foundation in manufacturing and distribution, has the least obstacles to overcome in successfully launching a new product line and creating such a brand.

The Control Account

A distinguishing feature of separate accounts, as mentioned earlier, is the ease with which they can be customized. Positioning them as "control accounts" to serve as flexible optimization tools for clients' entire portfolios will dramatically alter the sales process, the paper says. They will become a vital component for managing how investments affect a client's overall financial concerns, including real estate, illiquid investments, taxable events, estate planning and so on. Positioning the separate account in this manner will blur the roles of separate account sponsors and money managers as competition increases for the provision of fiduciary services.

Competition will become intense, and the smaller players in the industry will either disappear or fall into a sales role. Huge investments in technology, brand identity and distribution will be required, handing larger players with deep pockets a clear advantage.

Product Distribution

Consolidation in the industry will create huge distribution channels, not the least of which will be the large, well-established mutual fund complexes, according to the report. The big wirehouses have the advantage of being the first movers into the arena, which could position them very well if they can effectively create multi-channel distribution, although market-share loss as a whole for the traditional firms is inevitable.

Independent sponsors (such as Lockwood Financial Group, in which the authors of the paper have a financial interest) for independent advisors are relatively new, and the category is still poorly defined. Many such firms are undercapitalized and have had to build their infrastructures on a piecemeal basis as their asset base has grown. With intense competition looming, these firms will have to change their approach dramatically in order to survive, the report says.

Money managers will have to provide more customization, and the emergence of a "super manager" may occur for clients with accounts in the $100,000 range. This super manager would fill a new and unique niche in the industry, creating a blended portfolio of proprietary picks from a group of "parent" money manager portfolios. This simplified approach offers an excellent educational venue for registered investment advisors (RIAs), as well as for the investing public.

Unbundling the four major components of a separate account-the money manager, the sponsor, clearing and custody and the advisor/consultant-will create value in pricing, the report adds. But by combining the components to create efficient economies of scale, the separate account business will be open to exponential growth. Still, major challenges need to be overcome, which is typical of an industry's development at this stage. A commitment to meeting these challenges by the people who practice in the profession is the key to the industry's future.

For a look at the entire 52-page report, visit the Money Management Institute's Web site at www.moneyinstitute.com.

The Evolution Of A Financial Concierge

Managed accounts are part of advisor Lewis J. Walker's big-picture strategy.

Ask Lewis J. Walker, CFP, CIMC, CRC and president of Atlanta-based Walker Capital Management Corp., about his history in the business, and you'll get a remarkable story. A member of the third class to graduate from the College of Financial Planning, Walker participated in and followed the development of the managed account and financial planning businesses from their beginnings in the early 1970s. "When we graduated, there were somewhere between 130 and 150 certified financial planners," says Walker. "Financial planning really was a brand new idea."

About that time, Walker was vice president of a real estate firm that developed investment properties. Even though he was selling real estate, investors asked questions about a wide range of financial topics about which he knew very little. Then he discovered a small nucleus of people who recently had formed a little-known organization called the International Association for Financial Planning (IAFP). "I thought this was really interesting because I thought that maybe here I could get information on a wider range of investment topics. I originally believed financial planning would be a great new way to sell more real estate investments."

But Walker got a lot more than he bargained for. The 1970s were a time when real estate investments were "hot," and inflation was rampant. "Primarily, we sold private placements and partnerships; these were not public programs," says Walker. Soon after, he obtained his securities license. "I got all these licenses and realized I really needed to be affiliated with a broker-dealer. At the same time, I was learning more about financial planning, and suddenly, the lights came on. At first, I thought it was a great new way to sell stuff, but then, I realized it was a process-an integrated strategy. Now this really was something new! I was fascinated," explains Walker.

The real estate firm where Walker began his financial planning career decided to launch its own broker-dealer. But the president of the firm suddenly died before all of the official documents were signed. "We'd done all this estate planning for him and he was going to execute, putting things in motion," Walker says. "But he said he wasn't feeling well that day, and sadly, he died at one o'clock the next morning."

Walker took the concept of setting up a financial planning division within the company and started out on his own. "I teamed up with my insurance agent-I knew about investments, and he knew about insurance. I was involved in financial planning and separate accounts from the earliest days. I've watched this business grow, and I've grown along with it."

The separate account business originally was fostered at the large brokerage houses. "A lot of this really goes back to Jim Lockwood and E.F. Hutton," says Walker. "The big wirehouses, particularly Hutton, developed the separate accounts concept, but it was aimed at high-net-worth individuals and institutions." This left smaller, independent advisors like Walker out in the cold.

But advances in technology began making separate accounts feasible for individuals with smaller investment amounts. As a result, independent brokerage firms, such as Raymond James and LINSCO/ Private Ledger (LPL), began offering separate account services to their reps. "Raymond James was a real pioneer in separate account management for independent advisors," Walker says. "They had a division I was affiliated with called Investment Management and Research (IM&R), which has now been merged under [the umbrella of] Raymond James Financial Services."

Walker's career catapulted, and his managed account business grew, so he joined such leading industry organizations as the Institute for Certified Financial Planners (ICFP) and the Institute for Certified Investment Management Consultants (ICIMC). A member of both boards, he also was past president and chairman of the ICFP and the ICIMC. "One of the best things I ever did for my business was to get involved with these organizations in a leadership position. None of these organizations had any money back then. That was the beautiful part, the volunteers who were on those early boards were true pioneers. We did it because we loved it and we believed in it," says Walker. Through networking, learning more about the profession and a sincere desire to provide unique solutions for clients through separate accounts and financial planning, Walker found that more business followed.

He believes networking with colleagues is even more critical today. "We're bombarded with information," he says. "There's a big difference between information and knowledge. Some of the best friendships I've made and some of the best ideas and best resources I've had access to have come from networking at industry organization meetings. I don't think anything beats sitting around with a group of colleagues talking about ideas."

Walker always has viewed managed money as part of a much bigger picture. When speaking of separate accounts today, Walker says that, more and more, people crave the human touch. "They want to meet and talk and have things done personally. Technology is a tool, a good part of our business, but you cannot beat personal interaction." Walker's main concerns today are that the separate account business is reverting to the days of selling product, especially with the advent of Multi-Discipline Accounts (MDAs), and that it's getting away from financial planning and consulting.

"We're dealing with a big model-tremendous estate planning needs, tax-planning needs, legacy concerns, charitable giving, business planning, business-succession planning-all sorts of things enter into the equation," he explains. Walker's firm provides its clients the extra value of finding strategic partners to help serve their clients in highly sophisticated areas. "It may be elder care, concentrated stock positions, how to deal with concentrated wealth, any number of things. In a sense, I'm becoming a 'financial concierge.'"

In keeping with that idea, Walker has developed and trademarked a training program called the Strategic Financial Consultant, focused on the blending of holistic financial planning with fee-based asset management. He's also writing a book on the subject, and he currently visits interested advisors at their broker-dealers and trains them on the concept.

The extra services he provides his clients, including managed accounts, are part of the next evolution Walker sees coming in the industry. He feels advisors today need to go the extra mile to really differentiate themselves. "You're not going to add value strictly with managed money, though," he says. "You're going to have to do it some other way. That's the evolution that's going on in the industry now. The training program is my role in it."

Venerable Mutual Fund Company Joins The MA Biz

By Lisa P. Gray

Everyone in the industry today is talking "Separate Account Speak." Everyone. So what really is going on with separate accounts? How fast are they growing and in what sectors? A good indication is the growth that Boston-based MFS Investment Management has experienced this year after entering this booming business. The firm also has an interesting slant on how it views the benefits.

Bill Taylor, MFS' senior vice president and director of private portfolio services, offers good insight on their popularity and how valuable the individual advisor is within the managed account process. "We hear a lot about customization," says Taylor. "The general press seems to only look at tax efficiency and the ability to place restrictions on accounts, which is something you can do with separate accounts but not a lot of other investment vehicles. But the popular press is missing the fact that the financial planner or the financial consultant is the one who provides the customization. They're picking the most appropriate money managers for the client, and that's a huge customized benefit to the client."

Multiple-discipline products or accounts (MDPs or MDAs) are springing up all over in today's separate account world, but Taylor stresses the importance of using the MDP as part of the consulting process and not just as the next "hot dot" product to sell. "One of the things we do when we hold educational seminars for clients is to tell them that they need to get involved with the process. We may not even be the most appropriate managers for them, but the process will help them stay in the market longer, and ultimately, those are the people who will be the most successful."

What's so great about separate accounts? They're an excellent way for you to deepen client relationships by getting to know their financial lives, educate clients in the benefits that individual financial planning and consulting can yield and create a lifelong, higher-quality business and life plan for yourself. It's a win-win plan for everyone.

"We've developed tremendous relationships with firms in our variable-annuity and 401(k) areas, and now separate accounts are giving people a different way to have access to our professional management," Taylor says. "All of our field reps (called regional vice presidents) have been trained in the Certified Investment Management Consultant (CIMC) coursework so that when they speak to advisors and consultants, they can emphasize the most important part of the separate account business, which is the process of customizing the separate account investment vehicle to each individual client's particular needs."

Lisa P. Gray is a Memphis, Tenn.-based financial writer and former veteran advisor serving the affluent market.

What To Consider When Choosing A Money Manager

Look at stock-selection abilities, communication skills, personality-and more.

By Don Gartlan

Selecting and servicing a mutual fund is relatively straightforward for the average financial advisor. But selecting and servicing a separately managed account comes with greater challenges. These challenges demand a higher caliber of communication, cooperation and understanding between advisors and money managers typically not required when handling mutual funds.

Let's take a look at some of the differences:

To select an appropriate mutual fund for a client, you examine its history, consider its style and assess the fund family of which it is a part. But selecting managers for separate accounts requires due diligence of a different nature. After completing the investment-policy statement for the client, the manager search begins. You carefully evaluate each manager's skills and style, and work with the managers to customize a fund (or account) to suit each client's individual investment needs according to the policy.

To assess the suitability of a manager, you examine his or her capabilities in stock selection, servicing, operational support, and the ease or difficulty with which information can be obtained. Occasionally, personalities might enter the picture. Will you be comfortable working with the manager on a regular basis? How are differences solved? Above all, you must be completely satisfied that the money manager has the potential to meet your client's goals, as well as your professional needs.

For their part, the manager should have a full understanding of the managed account program you are developing for your client, its intricacies, the tools to be used, other professionals who might be involved and how the program will support your client's overall investment plan, which might include other funds.

Both you and your manager must thoroughly understand your respective roles in the total portfolio approach. For example, a value manager should be able to fully articulate the role he or she will play in the client's overall portfolio in selecting stocks so there is no confusion about the investment style to which the manager adheres. Once that style is fully understood, the role it plays in the overall portfolio will be clearer, too. You may need to revisit this issue from time to time to ensure there is no "style drift" taking place to boost performance in the event the manager's style goes out of favor.

Style, of course, is not the only area in which managers differ from one another. Some have stronger capabilities than others in certain market sectors and are more proficient in stock selection in those fields than in others. You should make sure the client understand the specific attributes and strong points of each manager. Having this information helps you explain to clients why you chose a certain manager.

You've Picked The Manager: What's Next?

After selecting the appropriate managers, it would be beneficial to revisit the investment-policy statement to confirm that the investment parameters based on the client's goals and objectives have indeed been followed. Customizing separate accounts according to each client's individual needs presupposes that each client's investment results will be different to some degree, even if the same asset-allocation percentages are used. Although two clients may have the same parameters of 60% stocks and 40% bonds, for example, one client may require his 60% equity exposure to consist of 35% large cap and 25% equity mutual funds, but the other client may require his 60% equity stake to consist of 40% large cap and 20% small cap. Each has the same allocation, but with different style subsets. Therefore, homogenous conclusions cannot be made about separate accounts as they are with mutual funds.

You and your managers should communicate regularly with one another to ensure they are working most effectively for the client. But, by having a clear understanding of the style, strengths and weaknesses of the manager-and the processes being adopted-you might find it unnecessary to maintain constant contact with managers. You should avoid trying to micromanage the programs in your clients' portfolios. By carefully selecting the right managers for the right tasks, there should be no need to do so.

Managers should keep you in the loop, informing you of changes when they take place or when they spot a stock that violates their investment discipline. Let them know you expect this. Doing so makes it less necessary for you to be on the telephone with the manager on an almost daily basis.

To sum up, the main keys to selecting and evaluating money managers are:

1. Choose the most suitable professionals for each client;

2. Understand their investment approaches;

3. Recognize the roles each will play in the clients' portfolios;

4. Maintain regular communication with them.

The Manager As Ally

Managers can be a great resource to you for your marketing and business development plans, too. They often have expertise in such fields as foundations, hospitals and Taft-Hartley funds and can guide you in how to best approach them.

They also help educate your clients. During client conference calls or speaking at one of your upcoming seminars, they can explain such things as why they are taking certain actions in the portfolio, and how they see the investment scene shaping up in the coming weeks, months and years.

A good manager can be a strong ally for you-another reason to choose carefully. Clearly, a well-constructed portfolio with top managers doing the stock and bond picking can enhance your image with clients and could lead to more business.

Director of Russell Managed Portfolios, Don Gartlan is accountable for the success of Russell's high-net-worth managed accounts product within U.S. Individual Investors Services. He is a former director of the Institute for Investment Management Consultants and is a member of the Investment Management Consultants Association.