by Cynthia Harrington
The business headlines are filled with stories of problems with separate accounts.
The costs are too high, the customization too low, the promised tax savings not apparent. Yet the assets in the accounts keep growing, to the tune of $970 billion by the end of 2003.
Little by little, even diehard opponents are finding a way to benefit from individualized asset management.
Evensky, Brown & Katz, of Coral Gables, Fla., found a way and a place to use separate accounts, despite the 1999 pronouncement of principal Deena Katz that the expensive separate accounts were “strictly an ego trip for clients.”
The motivation to explore alternatives was the increasing frequency of downgraded bonds. The firm had bought bonds individually for clients in
a laddered strategy. They were happy with the service and low transaction costs from a longstanding bond brokerage relationship. “But we don’t begin to have the resources to monitor bond quality,” said Harold R. Evensky, CFP. “And we didn’t want to be put into the position of calling a client with the news their bond has been downgraded and the price is down, but everything is still okay.”
The obvious solution of returning to bond funds didn’t please firm principals. So they set out to see if they might access the professional managers directly, without the layers of administration offered by most separate account programs. After a search for bond managers with good resources for credit quality analysis and a bias to laddering, they approached four firms — Nuveen, Rittenhouse, Neuberger Berman, and Thornburg, eventually selecting Thornburg.
Evensky and his colleagues place a client’s bond portfolio under the care of an individual portfolio manager. The managers have limited discretionary authority on that account, and clients pay a fee for the service. Evensky runs the numbers, though, and figures that the client’s cost has not increased. “We used to buy bonds well but in $100,000 lots. Thornburg buys in $5 million lots,” said Evensky. “I figure that savings makes up for two years of their expenses, meaning we get the bond credit analysis work essentially free.”
The firm also places client assets in separate accounts with Seattle-based Parametric Associates. Again, the choice is to add a specific strategy or skill that Evensky doesn’t have or want to have in-house. Parametric targets a market return but adds the benefit of tax loss harvesting. In the projected low-return environment, the extra half-percent makes a difference. “What Parametrics does is as close to rocket science as you can get in the investment world,” said Evensky. “Their work is immensely complex in how they manage to keep trading costs down and produce a minimal tracking error to the index.”
Advisors who seek a multi-manager approach have new options as well. Entries into the market promise partnerships with advisors in working with their clients.
Kurt Wiessner, managing director and principal of GlobalBridge Inc., describes the difference as their being a pro- fessional services firm, not a product provider. “Our CPA partners have a higher level of involvement with our firm,” said Wiessner, co-founder of the Minneapolis-based firm. “We help the advisor solve complex portfolio issues that sometimes stem from the sale of a client’s business or need to manage a concentrated stock position.”
The customization offered by GlobalBridge is seamless to the end user, however. Billed as a “private label” separate account program, GlobalBridge plugs into the existing technology of the advisor. “We offer a unique set of asset managers that don’t head to the bigger wrap fee type programs,” Wiessner said. “We think that the portfolio solutions that advisors deliver to their clients out to be on their platform, not ours.”
GlobalBridge isn’t seeking to work with every investor, nor with every advisory firm. Clients with an excess of $1 million to invest form the target investor universe. CPA firms with an established financial services unit with key people in place form the target advisor universe. “We look for CPA partners that share the belief that high-net-worth clients are best served by a comprehensive, exclusive strategy,” said Wiessner. “We also help CPAs maintain their neutrality because we’re not a custodian, not a broker/dealer, and we haven’t cut any sweet deals with the managers.”
GlobalBridge unbundles services and fees. Trading costs average one-and-one-half to four cents per share, but are not marked up as part of the overall fees. The typical account costs a total of 75 to 85 basis points delivered to the advisor.
Even Beth Gamel, CPA/PFS and executive vice president of Pillar Financial, in Waltham, Mass., tells new advisors not to reinvent the wheel. “Today there are a huge number of platforms,” Gamel said. “I tell people who are just starting out on this to look around and find those programs that truly do the due diligence and that scour the market for the best managers.”
Gamel has offered separate accounts to clients for 15 years through an in-house effort of due diligence and manager tracking. The captive effort gave Pillar a marketing edge, with lower fees and different managers than other advisors. “The problem with the big brokerage separate account platforms is that all the different firms ended up offering the same asset managers,” she said.
Changes in the industry in recent years broadened even Pillar’s choices. Where all their managers had been hand-picked before, they’ve now found a few managers from Schwab’s platform. “Either we saw new names there that we didn’t have access to before,” said Gamel. “Or in a few cases the fees were lower on managers we were already using so we transitioned those clients over.”
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