Independent Broker-Dealers Improving SMA Programs

Who's doing what with in-house and third-party programs.

There's no doubt that separately managed accounts (SMAs) are a growing area in the world of financial advisors. Yet, historically, many independent advisors have been forced to sit on the sidelines while wirehouses lead the way in products and technology for SMAs. Increasingly, things seem to be changing in the world of independent broker-dealers.

"Until a year ago, we had a very standard SMA program," says Jeff Holland, vice president of consulting services for Raymond James Financial Services. "We had a due diligence process consisting of a slate of managers, and we'd give it to the field and say, 'Here you go.' But manager selection is only one of the various steps in the investment process."

Now, like many other broker-dealers, Raymond James is working to incorporate separately managed accounts into the firm's universal platform. According to Holland, Raymond James has also layered in portfolio construction tools and additional services taken directly from the institutional world.

Marc Kawakami, head of advisory services for ING, says his firm has put together a fairly robust SMA program. "There are 70 different disciplines available, spanning all the core asset classes as well as some of the more sector-oriented," he says. "It's one component of the overall platform, meaning that we consolidate all the quarterly reporting and billing of our non-SMA business in with it."

Kawakami explains that ING has built the system by incorporating various tools and products, as compared with the all-encompassing turnkey approach that has been the norm until now. As a result, advisors can take investment solutions such as an IRA account, mutual funds or others and work with those products in the same system that handles SMAs.

Some firms are calling it their "new UMA," short for unified managed account, which has been the talk of the town for the past year by other broker-dealers, wirehouses and third-party platforms.

"The beauty of it is not to single out separately managed accounts as the be-all and end-all starting point, but to make it part of the advisor's tool kit and help make the advisors themselves the cornerstone of the solution," says Kawakami.

Like ING, National Planning Holdings also has seen the benefits of creating one unified platform for SMAs and other products. "We've kept our four b/ds as separate entities, but consolidated technology so that we're all on the same platform," states Shawn Dreffein, president and CEO of the firm. "There's huge cost savings in that."

The end result is almost always a proprietary internal platform maintained and expanded in-house. Lincoln Financial, for example, has LincSolutions. The platform has three components: account aggregation, planning tools and back-end implementation. By pulling all the data into the b/d's planning tools, advisors are able to do Monte Carlo simulations and efficient frontier planning, allowing them to ensure that their recommendations meet a client's objectives. The account aggregation element allows advisors to see the client's assets at their firm and also at other brokerages.

Yet not every firm has gone this route. A year and a half ago, Securities America launched its SMA platform, Managed Opportunities, through a contract with Sunnyvale, Calif.-based Oberon Financial Technologies.

"We looked at platforms for a year before deciding on Oberon," explains Dennis King, CFP, and vice president of business development/fee based sales at Securities America. "We considered EnvestNet, Advisorport, Lockwood, but we were really comfortable with Oberon." According to King, a key element in the decision was not only the capability to access money mangers, but a solid infrastructure that allows the firm to reach out to advisors and train them on the asset management side of the business.

"The deciding factor was Oberon's willingness to meet our business requirements," says King. "That main requirement was to have a platform where advisors could not only access separate account managers, but also have an integrated platform through which they could access mutual fund managers. A lot of the other platforms' forte was separate account wrap, and that was it."

Kings adds, "The advisors like the convenience of a fully allocated portfolio using separate account managers all in one account with quality overlay portfolio management, from the asset allocation and tax management perspective. It's a full, Web-based turnkey platform." He goes on to explain that the firm also uses SunGard's platform, which allows their advisors to consolidate and aggregate assets and report this to clients. "It's a fully integrated financial planning and asset allocation modeling software program using their platform," he explains.

Dreffein of National Planning Holdings says her firm did not have to struggle with going from a mainframe world to an Internet-based world, which made it easier to introduce their own technology. "Our firm was launched in '98, so we didn't have the massive legacy systems to convert that others do. So, we use Curian, Manulife and Nationwide. Curian brings more uniqueness-lower minimums than most; it is totally electronic from the proposal, client confirms, and all the way to the communication with our compliance department." Dreffein says it's a win-win situation for both the advisor and the firm's back office.

Training, Coaching

Of course, having an integrated platform is one thing, but as King says, being able to train advisors on its various aspects is another. In the past, independent broker-dealers trained advisors on products and investments as unique parts of a portfolio. Today, however, the tools involved in separately managed accounts, as well as the training on managed money, have been folded into large-picture issues.

Securities America provides coaching and business development programs for their advisors. In addition to their national preconference transitioning workshops, where they bring in industry specialists like Scott MacKillop and successful SMA advisors, they also offer practice management and professional development training and coaching.

And Raymond James, for example, has created a training and educational effort that takes SMAs into account. In addition to online training, the firm has RJ University, which offers a program to explain the basics of the separately managed account program before moving into more detailed issues. SMAs also have been included in the firm's revamped proposal system, and are addressed in regional meetings with advisors held throughout the year.

"Our advisors already know how to find clients, so we're talking to them to find out why they're not doing more SMA business," explains Holland. "Maybe they thought it didn't make sense for them, or that there weren't enough tools, but we're doing e-learning as a broad educational effort." Holland adds that about 80% of their 5,500 advisors are independent, and tend to do managed account business more frequently.

As they do with technology, AIG's broker-dealers take a unified approach to SMA training. "We take the collective resources of all the [firms] and do personal training around the country, as well as online," offers Mark Goldberg, president and CEO of Royal Alliance, one of AIG's four broker-dealers. "I tend to think that, philosophically, training around a product for business building, is not the best way to go. It should include the technical as well as the business building and practice management, too."

Carolyn Armitage, ING's senior vice president of advisory services, agrees. "We always incorporate [in our training] how separately managed accounts can fit into an advisor's entire practice, explaining how the billing and performance reports can be combined on the other advisor-directed pieces."

Similarly to Raymond James, Lincoln boasts LFA University-an overall training program that includes SMA education on separate tracks during their national planning forums, one-on-one branch programs and web-based options. They also have developed an in-house "skill index" for rating managers. Says Rob Studin, executive director of financial advisory services at Lincoln Financial, "It takes the due diligence burden off the advisor."

Gallman adds that the firm also provides in-depth training on the understanding and implementation of SMAs. This includes its Manager Select coaching classes that help groups of advisors build an SMA practice and their Manager Select symposiums, which are "road-show" type, hands-on training with members of the LPL team and select managers who discuss their style of management.

Business Challenges

Despite the combined training and technological advances in SMAs, challenges still face advisors doing separate account business, and some broker-dealers disagree on just what those challenges are.

"I think the biggest challenge is an old one," says Royal Alliance's Goldberg. "It's what matters to the advisor who's trying to run his or her business efficiently. We try to make the administrative paperwork burden lighter, but given the regulatory environment, it's somewhat voluminous." He says that AIG has worked to reduce the amount of paperwork associated with separately managed accounts, but it's a struggle. "We tend to focus on lowering administrative burdens within our industry. If I were to suggest to any organization where they should focus their energies and monies, it wouldn't be in marketing, or practice management, but on lowering the burdens for advisors to use these programs."

For Lincoln's Studin, understanding the pricing involved in combining various products is the biggest challenge facing advisors. "Pricing has been the biggest challenge, only because we're mixing so many things other than SMAs within our platform. We're bringing in no-load mutual funds, ETFs, stocks, bonds and other investments, and when you bring that all together the pricing gets a little bit confusing. If we were still using an isolated SMA platform that only handled managers, we wouldn't have that problem."

Others believe the biggest task facing broker-dealers is the age-old challenge of getting advisors to use SMAs. "I think the only real hindrance today is inertia on the part of advisors," says National Planning's Dreffein. "If you're used to doing something a certain way, change is difficult. We're all like that. SMAs are wonderful products, but the environment requires advisors to educate themselves about their benefits and relearn how to make these presentations to clients."

Kawakami agrees. "Advisors got very familiar with the investment choices they were using before. They had systems in place and established relationships with wholesalers. Now they're entering a new arena, and they're going to have to invest the time learning it. In addition, information on SMAs is not always as readily available as other products, which means they're going to have to go look for it. So the challenge is time and the cost benefit tradeoff of investing in a new business."

Challenges also exist for the platforms themselves. Because they are proprietary tools that are continuously evolving and changing, broker-dealers must work to stay on top of advisors' needs.

For Studin and Lincoln Financial, the challenges facing the platform mirror the pricing challenges facing advisors. "We're working to price the portfolio to the advisors, not the client," he states. "For the client, pricing is fairly seamless. We charge a set fee based on assets under management, with certain breakpoints. But an advisor may be paying 30 basis points for an ETF, 50 basis points for a separate account manager and underlying charges for mutual funds. We've developed technology that helps clarify this, and it's in the works right now."

According to Studin, when advisors input the different asset mix for an account, they'll get not only the total cost to the client, but a breakdown of the separate fees of managers as well as total compensation to the advisor.

"I think the core task for the industry is to provide a venue where both the client and advisor will have the ability to see and work on all those investments at the same time," says Goldberg. "After all, what good is it if an SMA has great allocation and diversification strategies on its own, when the balance of the client's assets and portfolio skews it to the point that it's not effective."

Goldberg, like many others in the industry, thinks that if new tools are only applied to the world of separately managed accounts, broker-dealers will not give advisors what they need to serve clients properly. "The opportunity for the industry is to move toward universal tools that are used and effective in SMAs as well as across the board, so the advisor can manage that relationship the best way possible," he says.

More Choices For More Clients

So despite the upheaval of recent years and the ongoing evolution of separately managed accounts, is it easier for advisors to conduct SMA business than it was in the past? Are SMAs becoming more "client-friendly?"

"Absolutely," says Kawakami. "If you think back ten years ago, we were calling the money manager, who'd then ask for a commitment on $40 million. 'We don't do it that way, we're an independent,' would be our response, and they'd hang up the phone."

Fortunately, Kawakami says, times have changed for independents. "Now we're working with the best managers in the industry, technology is constantly improving and we've put SMAs into a platform they're already successfully using for funds and individual issues. The advisors are starting to figure out that, yes, they have to learn a new type of investment, but the support's there if needed."

As for the continued evolution of separately managed accounts and its technology, one thing is certain: multi-discipline-type accounts (MDAs) and unified managed accounts (UMAs) also are quickly becoming part of managed money for independents.

Royal Alliance (AIG), for example, has already begun offering MDA-type accounts. And although Goldberg admits it has yet to receive an "enormous reception," he believes in the growth of this area. "We're in the early stages of product innovation and development within these advisory programs, and we'll see some unique product developments coming out on the managed side of our business," he offers. " The people on Wall Street who are managing money on a private basis are completely different from the people who developed funds, annuities and some other securitizations. In that sense, we'll see some crossover."

Likewise, LPL has also begun offering multi-discipline accounts. "We launched our first multiple-discipline account in February, called the Manager Select Diversified Portfolio, and we went with what I call kind of a multi-affiliate approach," explains Gallman. "We wanted to find a distributor that owns several institutional independent managers, but could tie those together with their own internal overlay portfolio capabilities. As a result the firm we selected-CDC IXIS-has developed nine models for us, five modeled after our asset allocation models with $500,000 minimums and four broad asset class portfolios that contain two to three managers with $250,000 minimums. It's been a huge success."

Gallman says LPL's advisors requested lower custody, clearing, administrative and management fees, and the firm agreed. "We're continually making those types of price adjustments so they are more profitable for them."

Although Lincoln does not currently offer an MDA-type product, Studin says it's coming down the pike this year.

Others are concerned about the rush to offer UMAs. "I'm finding that everyone is touting that they have a UMA," says Kawakami, "but it's unclear whether anyone has a true UMA yet." For him, the idea of a brokerage account with the capacity to run multiple types of investment vehicles with some overlay management still seems dicey, once you factor in accounting and regulatory concerns.

Veteran financial writer Allen Plummer assisted with this article.