by Cynthia Harrington
The new package for separate account managers goes by many names.
Multidiscipline account, or MDA, is trademarked by Citigroup, the leader in the field. New entrants use multidiscipline product, MDP, or multiple style portfolios, MSP, to name the separate account products that are designed for smaller accounts. But whatever the nomenclature, they’re attracting plenty of attention.
The investment community is focused on MDPs because money is pouring into the accounts. Half of Citigroup’s $14 billion in new separate accounts assets flowed into their MDA last year, according to Institutional Investor. "This is a more simplified approach to using separate accounts," said Stuart Parker, managing director and head of third-party distribution for Citigroup Asset Management, in New York.
"Advisors have one place to call for updates, and investors get professional management without hiring multiple managers," Parker said.
MDPs not only go by different names, but also have different structures. The early accounts like those through Citigroup, offered one account that did all investing to meet a client’s asset allocation and time-horizon goals. In the second phase, an investment firm has an internal coordinator, or overlay portfolio manager, that manages the managers.
Investors choose from broad allocation models, such as 40 percent stocks, 40 percent bonds and 20 percent international equities. Assets are placed with outside managers that fit the prescribed styles, sometimes with multiple managers in each style.
The overlay portfolio manager conducts the due diligence on managers and performs the portfolio management services of managing for tax efficiency, performance reporting and eliminating concentration in any single equity.
The new product’s success is attracting competitors. Wells Fargo, believed to be the first bank to enter the fray, recently announced an MDP that they will offer to high-net-worth clients through their Private Client Services consultants. Overall portfolio management services will be handled by the German financial services giant, Allianz A.G. Bank. clients will have access to active asset managers owned by Allianz, such as Nicholas Applegate, Oppenheimer Capital and PIMCO.
"This whole area of separate accounts is continuing to explode. Clients want customized portfolios, tax efficiency and the feeling of owning stocks outright," said Jerome Paolini, the director of investment consulting at Wells Fargo Private Client Services, in San Francisco. "But one segment that’s not fully addressed by separate accounts is the smaller investor with $200,000 to $300,000. We now offer professional management and diversification through the MSP to that market."
CPAs can access Citigroup’s products through the referral system offered by Salomon Smith Barney’s Professional Alliance Group. Wells Fargo’s MSP will be available to representatives of its H.D. Vest subsidiary next year when Vest’s conversion to Wells Fargo’s money management platform is complete.
Not every firm is rushing to get on Wall Street’s new gravy train, though.
Norbert Mindel, CPA/PFS, CFP, JD and executive vice president of GE Independent Accountants Network, in Schaumburg, Ill., said that they’re going to take the most conservative approach. "The accountants we serve don’t want to lose the client," he said. "They don’t mind underperforming sometimes but they don’t want to lose money for investors."
Mindel believes in their disciplined asset allocation approach, which was founded on the belief that markets are inherently efficient. The center of their strategy is an asset allocation platform that spreads client assets among six to seven classes, placing those with the greatest tax impact into the client’s tax protected accounts.
The disciplined approach lost the firm clients in 1998 and 1999, when their portfolios were heavy in bonds and light in technology, but have gained fans since the market declined. Two-thirds of assets are with passive managers and one-third with active managers, like those in separate account programs. "There are two significant problems with active managers," said Mindel. "They’re not tax efficient and they can experience significant style drift."
Handing over the asset allocation decisions to a third party isn’t something that Randy K. Grant, CPA/PFS, CFP at Berkowitz Dick Pollack & Brant CPA LLP finds to be a benefit, either. Grant’s firm uses outside experts to select and monitor managers and report performance. They have a co-advisory relationship with the well-known Florida firm Evensky, Brown and Katz, as well as using SEI Investments’ multimanager platform.
"This is how we’ve built our practice," said Grant. "We’re smart people, excellent planners and excellent CPAs, but it takes full time Wall-Street-level talent to pick outside managers. So we outsource that function."
Grant does not delegate the asset allocation decisions. "If we’re going to pass off the responsibility to know the client’s comfort level, what does the client need an advisor for?" Grant said. "Besides when the system breaks down or doesn’t work, it’s the main advisor who’s held accountable."
It’s not just the asset allocation decisions that Irvin Diamond, CPA, PFS, CFP, of REDW Asset Management, in Albuquerque, N.M., doesn’t want to give up. Diamond’s firm does comprehensive financial planning, then places assets with mutual funds or separate account managers depending on the client’s needs and desires.
"Clients hire us for a very specific reason. They want us to watch their money for them. They want us and only us to do the management on the account," said Diamond. "Outsourcing that responsibility would never work for us."
If Citigroup’s experience proves true across the marketplace, the advantages of the MDP might win over some who said that they’d never use them. At first, the Citigroup MDA appealed to the intended smaller accounts. But according to marketing executive Stuart Parker, account size is growing.
"The last vestiges of financial consultants coming to use the MDAs are the pure investment consultants. At first, they said there’s no need to have an overlay manager - that’s our job," said Parker. "But they’ve had experience now with smaller accounts in the MDA, and what they’re realizing is that the underlying managers are performing better than they can get for even larger accounts outside the product."
Parker said that, despite their success, the MDA is not for everyone. "There are clients for whom this is just too much information. They don’t want to see the names of all the stocks they own," he said. "They want to just check the NAV in the newspaper for a few funds and that’s enough."
