by Cynthia Harrington
Media headlines continually trumpet the continued growth of assets in separate account programs. Industry researcher Cerulli Associates estimates that separate account consultant programs attracted $33 billion in net flows for the otherwise devastating first half of 2002.
But the excitement about placing clients’ money directly with asset managers is not widespread. The five big New York brokerage houses claim over two-thirds of assets in separately managed programs.
Separate account programs are slow to penetrate the independent advisor marketplace partly because the disadvantages outweigh the advantages. The market is fragmented among thousands of asset managers. The work of finding, evaluating and monitoring managers is up to the advisor.
The solution to that problem may be here. Data providers are stepping up to serve these needs. This year, both Morningstar and Schwab joined Prima Capital and CheckFree Investment Services with asset manager search products.
"We’re seeing more and better information on managers," said Christopher L. Davis, executive director of industry trade organization Money Management Institute, located in Washington. "The broader the information, the more likely it is that the best managers get selected and the worst get religion."
Delivering the data is not a guarantee of acceptance by independent advisors. Vincent A. Schiavi, CFP, CPA, PFS, started offering investment advice to clients in 1982. His Wilmington, Del., firm, Schiavi & Co., today manages $95 million - mostly in a combination of iShares and actively managed tax-efficient mutual funds. "I looked into separate accounts but didn’t find any advantages over what I’m doing now," said Schiavi.
"But I found disadvantages. I have difficulty knowing how accurate the performance returns are. With mutual funds, I can trust the published numbers," he said. "Plus, I have to worry about the quality of the composite portfolio and whether it includes clients that have left the firm, or whether it suffers from a survivor bias."
Schwab Institutional counteracts these concerns by adding research from San Francisco-based Callan Associates to its filtered universe of managers. Callan’s research provides in-depth quantitative and qualitative data points on selected managers. Basic data on up to 1,500 money managers with 5,000 managed accounts is screened from Checkfree’s Mobius database.
Schwab added customized analytical tools for the advisor to determine the level of risk, the length of manager time horizon, manager style, and asset allocation tools. The Web-based service will be offered free of charge to the 6,000 advisors using Schwab for trading and as custodian for client assets.
Morningstar introduced their Principia for Separate Accounts product in June 2002. It is integrated with the existing analytical database for mutual funds, stocks, closed-end funds and variable annuity accounts. The separate account component reports data as received from 500 money managers offering 1,800 different products.
The plan is for the separate account segment to be fully integrated with Principia Pro, and all the same analytical tools that now exist for the other products in the database can be applied to the separate account managers. In addition, users can now coordinate overall portfolio management for each client across product lines. The introductory price for the new segment is $1,995.
Denver-based Prima Capital answers the question of confidence in data by promising to check out the information they deliver to users. Prima screens the major asset manager databases, like Mobius CheckFree, PSN Effron and Nelson’s World Best Money Managers for those that target the high-net-worth market. They then run performance screens looking for consistency of alpha and consistency of risk-adjusted returns. All managers that make the first cuts are subjected to due diligence interviews.
"We sometimes find past performance numbers have changed due to correcting an error or an SEC audit," says Geoff Selzer, head of professional services at Prima. "Since most of the other databases rely on managers reporting in, they miss changes if the manager doesn’t update them."
Prima’s managers recheck quantitative data and add qualitative data. Users can search the results of 13 factors. To report seven of the factors, analysts must evaluate the quality of management, how the manager is currently structured relative to what produced the past performance, and how the manager is creating tax efficiency. Some 450 products from 250 private money managers currently make the grade.
At $7,000 per year for a single user license, Prima seems to be targeting larger firms. In fact Selzer reported their greatest success has been in customizing programs for multi-advisor practices, like Bloomington, Minn.-based RSM McGladrey. McGladrey effectively outsourced the investment advisory function to Prima. Prima, in turn, created a private-label custom application to McGladrey’s specifications.
The jury is still out on whether the new tools will help separate account sponsors penetrate the independent advisor market. Easier due diligence won’t answer all the objections. "Another reason I turned away from separate accounts is that I figure that the best minds for picking stocks gravitate to where the compensation is highest and that’s at public mutual funds," said Schiavi. "Plus, the tax advantages of separate accounts over mutual funds aren’t that great."
Nor are independent advisers going to rely totally on data to serve their clients. Davis said that the biggest decision for an advisor who is choosing an asset manager is the level of support they’re going to get from the manager’s field resource. "The advisor is going to consider whether that field rep is going to be there to explain performance moves - up and down - to clients, to help do client development and retention meetings, and to be available to help close big clients."
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