Is that good or bad?

More light is about to shine on the booming separately managed account business, which has emerged as a major growth area for the financial advisory industry.

Separately managed accounts, which heretofore had no high-profile Value Line or Morningstar monitoring service, finally have a popular scorecard. Morningstar, the Chicago-based fund rating service that in the 1980s and 1990s became the bible of the mutual fund industry, is starting to evaluate individual managed accounts.

But is that a good thing? And is the Morningstar star system used for funds going to work with individual accounts?

"I'm really skeptical. I don't expect the comprehensive report detail that is needed to evaluate these services," says Lewis J. Walker, a certified financial planner who uses separate accounts extensively at his firm in Norcross, Ga. "It's my job as an advisor to customize the separately managed account, and I think there may be some advisers who are going to use this service as a short cut and stop doing their job effectively," Walker adds.

He oversees hundreds of millions of dollars in these separately managed accounts, although he will not disclose the exact amount of assets. Walker says he has no intention of using the new Morningstar service.

But one of the pioneers of the managed money movement says Morningstar's entrance into the business is a good thing. "I welcome them (Morningstar). Finding benchmarks can be a messy thing, and maybe they can possibly help," says Len Reinhart, president of The Bank of New York Separate Account Services in Malvern, Pa., with some $7 billion in assets under management.

Reinhart, who spent a quarter of a century in the business, including heading up Shearson Lehman's money management division, says there is no paucity of information on a separate account after it has been set up. "Once you start with such a service, you get more information than you want sometimes," Reinhart says.

But finding information before one selects a separate account service can be difficult, he adds. "For example, each wirehouse can have its own benchmarks. It can be confusing," Reinhart says.

He also concedes it could also be confusing for those buying the Morningstar separate account service. That's because, initially at least, Morningstar will not be able to capture the entire universe. The wirehouses are not cooperating with it, according to a Morningstar official, but many independent providers are and some have signed on for the service.

"We don't think of this as the be all and end all. Still, we think this service will be useful for many financial professionals who are evaluating managers and want a second opinion," says Ryan Tagal, product manager for Morningstar's separate accounts service.

He notes that his firm has only been gathering information on these services for about a year. Still, does Morningstar have the expertise to cover a kind of business that is very different from mutual funds, the money management product of the masses?

This question is relevant because some of the biggest players in this field are not giving Morningstar the internal numbers and access to managers that investment companies have provided over the years. Resistance to the entrance of Morningstar, famous for its star ratings, into this business is understandable. Indeed, is it possible to effectively rate something that has become popular because it has been sold as a "process," not as packaged financial product such as mutual funds, when the latter has always been sold en masse with little regard for the individual needs of clients?

Separately managed accounts started to gain popularity and considerable assets in the wake of the 1987 crash, according to Reinhart. That's when wirehouses started to sell these services as something better than what the average client had in his/her portfolio. Before the separately managed account, some of these portfolios were often overweighted and had no customization. Usually, there was little or no attention to detail, such as the tax consequences of trading or the individual preferences of clients (such as no investments in defense stocks).

Separately managed accounts, which usually have significantly higher costs than the average fund, have always been sold as a premium money management service. And the business has prospered over the past few years. This comes at a time when mutual fund assets have been draining away in redemptions and the huge losses of most investors who have hung on through the bear market. So will Morningstar's new service inform or confuse?

"It's an interesting question, but I still believe that, given Morningstar's brand recognition and given that it is a third-party vendor without an axe to grind, this will be good for the business," says Christopher Davis, chairman of the Money Management Institute in Washington, which has representatives on its board from many of the big providers of separate account services.

Agreeing with Reinhart, Davis argues that Morningstar's service, along with others, will mean more data will be available on separate account performance. That, he says, will be a good thing.

Others disagree. "My fear is that with these monitoring services, these accounts will be mass produced and will start to be sold as a standardized product, just like mutual funds," argues Walker. Whether they welcome Morningstar or are skeptical, several money management executives told Financial Advisor there is a danger to the business. The popularity of the Morningstar service could draw in shoddy providers, firms that have neither the expertise nor the support services to effectively carry out the soup-to-nuts money management process. "This could become the next limited partnership," one wirehouse money management rep warns.

Since Morningstar started a rudimentary service for monitoring some of these accounts, there is debate over whether this is step forward or whether these accounts will become as popular and, in some cases, as disastrous as many funds.

The separate account process-which includes drawing up an investment management plan, tax planning and manager due diligence, among other responsibilities-is, at times, already being watered down by its popularity, several experts maintain. That could end up hurting the business.

For instance, an effective separate account with sufficient diversification requires at least $250,000 and probably more than that, many professionals believe. Still, some providers in the hunt for assets and business are now selling the process for as little as $100,000.

"That's not the way these things should run," says Gib Watson, who runs Prima Capital in Denver. "I would say the minimum for these vehicles should be at least $500,000."

Watson, whose firm is a competitor of Morningstar, adds that the service today lacks the detail of a comprehensive money manager selection firm such as Mobius, one of the older money manager selection firms. Mobius, which was founded as an evaluator of money managers in the late 1980s, was sold to CheckFree Investment Services in Research Triangle Park, N.C., in 1999.

Tom Steinberger, CheckFree's vice president and general manager, says that he sees Morningstar posing little direct competition. "We're basically looking at an institutional clientele. I don't think Morningstar is going to be able to sell to them in the beginning," Steinberger declares.

Several financial professionals agree that Morningstar's current offering will not be providing the thoroughness of other money manager evaluators, especially CheckFree, which retains the Mobius product service identity. "Morningstar, now, has a rather thin level of coverage. They're not strong on evaluating firms and their professionals. They're not supposed to be looking for the same things that mutual fund analysts are looking for," Watson says.

Steinberger emphasizes that his firm is not going to directly compete with Morningstar, but he does not dismiss them as a competitor. "We have respect for them. We have worked with them. But we are doing something very different. We are not rating-positively or negatively-money managers. Instead, we provide 200 different variables on money managers. We provide numbers and other variables on 3,300 money managers and 5,500 different investment styles," Steinberger says.

He says CheckFree would never rate the managers, leaving that up to the professionals and firms.

"It seems to me that what Morningstar is doing is a kind of a light version of Mobius," Watson says. "I'll be happy to stick with Mobius. That's all I'm going to need."

But Morningstar's Tagal notes that his firm has only been gathering data for about a year. He expects that the service will be expanded as more firms begin to cooperate.

Although Morningstar isn't using ratings yet, Tagal says there will be some kind of star rating applied for these services. "We are working on that and are adding a lot more detail to the service," Tagal adds.

Nevertheless, he concedes that Morningstar will have to take a different approach with separate accounts. "The nuances of the separate account are very different from the mutual fund, which has certain required reporting. Much of the information drips in [for] the separate accounts. Nevertheless, we do expect to evaluate these services for the investor and the adviser so they can see if these portfolios are really what they say they are," he says.

Tagal sees two immediate markets for the service. One, he says, is independent advisors who don't have the access to manager search services of their counterparts at the wirehouses and maybe can't afford services such as Mobius.

Tagal also contends that "captive reps" at the wirehouses could start to use the service as a way of obtaining "a second opinion on a manager." Right now, the big five of the separate account business are not using the Morningstar service or providing numbers. These big firms, including Merrill Lynch, Salomon Smith Barney, UBS PaineWebber and Morgan Stanley, hold about 75% of the assets of the $400 billion business, according to Davis. Tagal is hopeful that, eventually, all of these firms will cooperate and even subscribe to the service.

The Money Management Institute's Davis, however, is unsure. "In the long term, maybe. But in the short term the wirehouse are not going to cooperate with Morningstar," predicts Davis, who has representatives on the institute's board from many separate account providers at the wirehouses. But Davis says Morningstar will be a net plus for the separate account business, which continues to boom despite bad times in the stock market.

More light, more facts and more channels of access to the performance of popular money managers and their firms are likely to help the suddenly popular separate account business. Nevertheless, the business needs more ways to measure who is doing well and who is not, or today's growth could easily fade.

The business of separate accounts appears to be riding high right now, basking in the glory of not having self-destructed. Whether Morningstar improves the transparency or not, the players in the business should remember too much success has ended in sudden failure. That's when the light shining on an investment became a bad thing.