To the Washington, D.C.-based Money Management Institute (MMI), managed accounts of all types can be grouped as "managed solutions." Unfortunately, these investments were not solutions to the financial crisis and market crash of 2008 to 2009. Along with virtually everything else, managed accounts fell sharply.

A year after the worldwide nosedive, though, things look brighter for managed accounts. Assets have rebounded with the stock market rally—and so have asset-based fees for financial planners offering these accounts to clients. Moreover, providers are touting strategies that promise to make managed accounts more flexible and therefore more likely to hold up better than they did in this decade's two bear markets.

Overall, assets in managed accounts totaled more than $1.4 trillion at the end of the second quarter of 2009, according to Dover Financial Research of Westwood, Mass., which compiles data for the MMI. That was a drop of about 27% in 12 months, but up more than 12% in the second quarter. Managed accounts are heavily invested in equities, so it's no surprise that the recent fall and rise are roughly in line with major stock market indexes.

LEADER OF THE PACK

The MMI/Dover report lists six categories of managed solutions, led by separately managed accounts (SMAs). These fee-based accounts generally provide investors with access to highly regarded stock-pickers. These investors might not previously have been able to make the minimum investments those money managers require.

Besides "SMA advisory," the MMI lists a "rep as portfolio manager" category, where an advisor has discretion to make portfolio decisions rather than outsourcing those choices to a third-party investment manager. These two categories combine to make up the "total SMA industry," as expressed by MMI/Dover, which hold nearly half the assets in managed accounts.

Another category, "rep as advisor," gained assets in the past 12 months while the SMA industry total dropped. "Rep-as-advisor programs are nondiscretionary," explains Jean Sullivan, managing principal of Dover Financial Research. Thus, it appears that clients are increasingly demanding prior approval of the holdings going into their managed accounts.

The rep-as-advisor category now holds more than 20% of the assets in managed accounts, while mutual fund wraps hold more than 25%. That leaves barely 4% of managed account assets in unified managed accounts (UMAs), ETF wraps, and other advisory products. These may be the fastest-growing categories with tremendous future potential-but at this point they're minor factors in managed accounts.

OUT OF STOCK

The events of the last year, though, have somewhat dimmed SMAs' allure. "SMA platforms proved to be inflexible during the 2008 financial crisis," Sullivan reports in the MMI's current publication. "Investors and advisors became more conservative, so they wanted to move into cash. SMA and mutual fund advisory programs, though, typically don't allow large cash holdings. Thus, some advisors moved their clients out of SMAs and mutual fund programs."

In addition, Sullivan says, SMA programs don't include a cash "sleeve," so advisors can't earn management fees on cash. This is one reason for the increased use of more flexible rep-based programs. "As the equity market regains momentum and active management begins to outperform benchmarks, financial advisors will again find value in SMA investment products," Sullivan predicts.

Meanwhile, planners and clients are adopting more conservative investment strategies within SMAs, with less reliance on stocks and more on bonds. According to Sullivan, SMA assets traditionally have been around 80% invested in equities, leaving 20% for fixed income. At the end of 2008, relative strength in the bond market had raised that allocation to 29%; by mid-2009, fixed income was 35% of SMA assets, even though stocks rebounded in the second quarter.

Another 6% of SMA assets are in balanced accounts, so the total for fixed income might be close to 40%, or almost twice the historic SMA allocation. Apparently, planners and clients using SMAs are willing to give up some stock market upside, even during a strong quarter, in return for the stability that bonds can offer.

SMA SUPERIORITY

Recent SMA growth is not merely a matter of a firmer stock market, according to Jim Roumell, who heads an asset management firm in Washington, D.C. "Hedge fund investors found that they were locked in when the market started to go down last year," he says. "With SMAs, you get regular statements showing you what you own, and you can get out if you want. In addition, the fees for SMAs are much lower than the fees for hedge funds. So SMAs have been in demand from investors who were unhappy with their hedge funds."