Schwab, Fidelity and Waterhouse are building sophisticated SMA platforms.

In the independent advisory world, separately managed accounts (SMAs) are continuing to be big business. "Separate Account Consulting Programs," the Cerulli Associates' definition of SMAs using third-party manager programs or proprietary manager programs, gained assets at a rate of 3.67% over the three-month period ending September 2003.

In its managed account quarterly summary dated November 2003, Cerulli notes that for the 12 months ended September 30, assets in third-party manager programs grew at a pace of 24.3% compared with growth of 26.4% for all managed account programs, including mutual fund and nondiscretionary programs. Net cash flows, however, were 29% less than in third quarter 2002, which saw flows of $38.7 billion as opposed to 2003's third-quarter flows of $27.4 billion. Total managed account assets, including those in separate account consultant programs, mutual fund advisory programs, rep-as-portfolio manager programs, and fee-based brokerage programs, grew 5.1%, beating the Wilshire 5000's 3.7% rise in the third quarter.

Although the third-party manager programs saw an overall drop in asset levels for the year, third quarter 2003 garnered an impressive $12 billion in new assets. By far, the fastest growing independent third-party manager program sponsor is Charles Schwab, according to John Morris, newly appointed head of the managed accounts group at Charles Schwab & Co. "We're seeing incredible growth. The assets are just flowing in from advisors. We've grown from $9.6 billion at the beginning of the year with advisors to $12.7 billion-a rate of 33.7%."

No other third-party provider approaches Schwab's size in terms of either assets under management or breadth of its services platform. What's its secret? What makes its separate account programs different from the ones offered by Fidelity and TD Waterhouse-two other companies known for services they provide advisors?

The Schwab Edge

Being "first" has significant advantages. Schwab's first managed accounts program launched about five years ago. Fidelity's followed shortly after, and TD Waterhouse's program was initiated in 2000. Being early offers ideal positioning, which is definitely true in this case as Schwab ventured into SMAs with its Managed Account Connection, an open architecture platform that allowed advisors to choose from any number of money managers to implement their client's asset allocations and then custody those assets at Schwab.

"It was completely unbundled so the advisors could work with whomever they wanted," adds Morris. "The money manager would charge a fee and would negotiate that fee with the advisor. There also would be a Schwab fee for brokerage and services, then an advisor's fee, so it's truly open architecture with lots of flexibility and ease of implementation."

Being first also enables the largest and most rapid growth of assets. Today, Schwab boasts $11 billion in assets under management in separate accounts. Its two programs, Managed Accounts Marketplace (MAA) and Managed Account Select (MAS), provide access to outside money managers. MAS resides as part of the Managed Accounts Marketplace program.

Here's a brief description of both:

Managed Account Marketplace. The Marketplace program, from which Schwab's original Managed Account Connections grew, is the basic program for advisors wishing to use a fully open architecture platform for separate account business. To help advisors sort through the long list of money managers, Schwab has adopted within the program a Web-based tool using CheckFree's Mobius Group manager search database that it calls its Money Manager Analysis and Proposal System (MMAPS).

MMAPS enables advisors to do a search of managers, determine whom they want based on the criteria they use, create an asset allocation analysis and generate a customized program. Explains Morris, "We give them the tools they need to be able to sort through and make appropriate selections for the client. The program also can archive multiple proposals for any number of clients. MMAPS contains Managed Account Connections, which is basically a list of criteria for the advisor to use in searching for appropriate managers."

Managed Account Select. To facilitate the due diligence process, Schwab formed an alliance in 2001 with Callan Associates to provide its advisors with institutional-level research and review on money managers. "A lot of advisors came to us and said that even with the tools we had provided them, narrowing the list down to the managers they thought would be most appropriate was still a daunting task," Morris says. "This extra offering initiated the creation of our Manager Select program. Manager Select is the MMAPS program with some extra services such as access to the Callan research and the access to the investment managers. All account capabilities are delivered to the advisor client inclusive of fees. Advisors can pretty much design the program they want using the Manager Select program."