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.