Why would I give my clients’ money to another advisor? What would be my value?”
That was the common response in the early years when financial advisors were asked about managed accounts. Today, that product is a workhorse for our business. Financial advisors have amassed more than $11 trillion of client assets in this product, an idea once so abhorrent that when I suggested using them I was told I could lose my job because branch office managers were convinced the product would mean the collapse of their revenue.
Now let’s take another product that gets so little respect you could call it the Rodney Dangerfield of financial advice: the annuity. You can tell it gets no respect when you look at its share of retirement assets. That’s eerily similar to the treatment once given the first managed accounts. Annuity skeptics continue to abound even as the product evolves. The new reality of these vehicles is that they are designed to protect client assets more efficiently than a regular portfolio of investments.
Consider the following arguments and ask yourself if they sound familiar:
“Managed accounts are too expensive.” The first managed accounts sported annual fees of 3% per year, which seemed high to portfolio managers offering their institutional clients the same service for much less. Three percent didn’t sound so high to stockbrokers when you compared it to the commissions on their stock trades or to the 8.5% front-end loads on some mutual funds, the 4% load on a bond or something similar for a unit trust.
The reality is that competition brings down costs—to the benefit of the consumer—and managed accounts now average closer to 1% per year. The 8.5% sales loads are gone, and the commissions are zero at Fidelity. Likewise, annuities are not all priced the same way, and advisors who remember the once heavier costs on variable annuities are usually surprised by the current figures.
“Selling managed accounts will cut my income.” Advisors who were used to commissions thought that turning assets over to a managed account would mean their income would be slashed. They are wary of annuities for the same reason: They think purchasing annuities on most platforms means reducing the amount in assets they manage directly.
When it came to managed accounts, more forward-thinking advisors saw the potential for building assets, leveraging the markets for growth of AUM and giving themselves more time to work with clients and to find new business. They traded the short-term hit to their current income for a chance to build for the long term.
For similar reasons they can benefit by adding protected income strategies. These recommendations are often viewed by clients as an additional service—which means it’s something that can help you capture assets that would otherwise be held by others. So it’s important that you look at a protection strategy as something that can increase your overall share of a client’s wallet.
“Managed accounts are too complicated.” When managed accounts first arrived, the complaints from advisors rained in on their company headquarters, as they howled about the need for multipage investment policy questionnaires, client signatures and the additional registration required for them as investment advisor agents. The multiple asset classes, they argued, were too confusing to clients, as were all the subadvisors’ names.
They often asked things like, “Why can’t I just get the client’s OK on the phone?” “Why do I need an additional license like the Series 65 or 66?” “Why can’t we use just the managers beating the market?”
What they were likely afraid of was the new level of professionalism being asked of them, since the trend would require them to act more like advisors and less like stockbrokers. The managed account is not a product, said one of the industry’s pioneers, Len Reinhart. Instead, he said, it’s a service. It looked like the investing approach taken by consulting units such as his old one at Smith Barney that served corporate pension funds and endowments. Clients now had not just a personal advisor, but also a consultant selecting managers and tracking performance, as well as full-time investment teams managing their money.