In a volatile market, SMA experience may help retain clients.

Editor's Note: Special Sections Editor Sydney LeBlanc recently interviewed Michael H. Lewers, managing director of the Managed Assets Consulting Group for Nuveen Investments, about using separately managed accounts in an advisory practice.

MAQ: Mr. Lewers, in light of the volatile markets we've experienced, can you tell our readers how separately managed accounts can help advisors retain clients in the current environment?

Lewers: Of course. Separately managed accounts have certain advantages that work well as the core of a well-constructed portfolio for affluent and high-net-worth clients, but they are not necessarily the right solution every time. Much more important to client retention, in this market environment or any other, is the time the advisor takes to understand what motivates the client-beyond what they may write down on their initial questionnaire. We all know that selling the "hot dot" is only successful in the short run-once that asset class or strategy cools down, a client who has no other relationship with his or her advisor will likely move their assets. Long-term retention is a function of trust.

However, I do believe that advisors who have a lot of experience with separately managed accounts may have an advantage in client retention, especially in a volatile market. And that's because those advisors have typically mastered the consultative approach-particularly the skills of analyzing the client's motivations and true risk tolerance, conducting portfolio reviews that reflect their understanding of the client's situation and how that situation has changed over time, and talking clients through the rough patches so that emotion does not dictate investment strategy. These advisors have taken their clients through a process, and in the end, they will reap the benefits of that process.

MAQ: What level of assets do clients need to really take advantage of separately managed accounts, and how does the level of assets affect retention?

Lewers: Our advice is that clients need to have at least $400,000 or $500,000 in investable assets before they should consider separately managed accounts. The client will need to be able to meet account minimums, usually around $100,000, and be able to diversify across several disciplines, such as large-cap growth, large-cap value, international and fixed income. Our experience shows that advisors who succeed in client retention are experts at diversified portfolio construction. They know that the hot style cannot continue to outperform over the long term, and they have prepared their clients to weather the ups and downs of various styles.

Lately we've seen account minimums begin to decrease in various platforms, and an increase in multi-disciplinary account options-where a single account can be diversified across several styles. These accounts will offer advisors some alternatives for clients with less than $400,000 in assets. I don't know if we've seen enough of a track record to assess how well multi-disciplinary accounts will retain assets through various market cycles-I believe retention is much more a function of advisor excellence than investment structure.

MAQ: Which strategies can advisors use with clients who have a low tolerance for risk? Are there any custom portfolio solutions available in SMAs for this purpose?

Lewers: Advisors who want to use separately managed accounts in their clients' portfolios can usually choose from a list of managers who have been approved through a due-diligence process at the various sponsor firms. Risk measurements are one of the criteria listed for each manager; if the advisor is working with a client with particularly low risk tolerance, he or she can choose managers who match the client's level of comfort.

MAQ: Is there any way for clients to offset losses sustained this year by using SMAs?

Lewers: Most asset classes sustained losses this year; again, those portfolios that were well-diversified fared slightly better. One strategy that we're seeing is a harvesting of losses in separate accounts for tax purposes-not necessarily to offset gains this year, but to secure carry-forward losses. This can be done in a separate account structure since the investor owns all of the underlying securities and has his or her own cost basis in the portfolio.

MAQ: Institutional caliber management is a key in offering SMAs to investors. How does this element play a role in helping to retain clients?

Lewers: Separately managed accounts were first offered as a vehicle designed to give wealthy investors access to institutional-quality management. Today, many more firms with varying degrees of experience in institutional accounts are entering the separately managed accounts arena. The emphasis in the separate accounts industry on consultative relationships, diversification across investing styles and adherence to a stated plan mirrors the advice that the treasurer of a large endowment would be offered today.

Institutional-style management is really focused on long-term stewardship of assets and the discipline to carry out a stated plan even in the face of adverse market cycles. Individual investors can benefit from applying the same discipline, but often they are not exposed to this level of thinking about investing. That's where an advisor can really help. An advisor who is truly focused on providing institutional-quality service, rather than management, will be able to retain his or her clients through the inevitable periods of challenging market performance.

MAQ: Please explain the use of the investment policy statement in retaining clients in the current environment.

Lewers: We believe that individual investors should develop an investment policy statement-it's a great way to review many issues with the advisor that may not otherwise come up as early in the relationship. A thoughtful, thorough, well-crafted IPS clarifies investment goals, risk-management strategies, cash-flow considerations and restrictions on certain securities. An IPS will also outline the roles and responsibilities of the advisor and the client, helping clients focus their thinking and adopt a more "institutional" philosophy.

One of the client's responsibilities under an IPS is to meet with the advisor frequently to review how the portfolio is performing against the criteria established. Often the outcome of more frequent meetings is a stronger relationship-which in the end, builds trust in the advisor and improves asset retention.

MAQ: Is it recommended that advisors blend mutual funds and SMAs in this market, or should this be a strategy that is used regardless of conditions?

Lewers: I believe advisors today recognize that they should blend various investment products to meet their individual clients' needs and goals. Separately managed accounts are attractive to many investors, especially as the core of a well-constructed portfolio. Mutual funds, closed-end exchange-traded funds, ETFs, alternative investment strategies and limited partnerships all have certain features or benefits that will be appropriate for different clients.

We find that successful advisors start with a well-crafted core portfolio, and then add in specific high-quality income-producing vehicles or aggressive growth funds either as completion strategies or to tilt a portfolio in a certain direction. Many of the advisors who work with us start with a Rittenhouse large-cap growth separate account or an NWQ large-cap value separate account, then use a Nuveen municipal closed-end exchange-traded fund, for example, to capture exposure to the high-quality tax-free income that a leveraged municipal fund can generate.


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