Whether separately managed accounts are ultimately a product or a process, they ultimately require convincing the client to sign on the dotted line. In fact, SMA clients have to sign on many dotted lines. And as with any sales process, financial advisers find a variety of ways to persuade their clients to pick up that pen.
On one side stands a group of advisers and marketers who describe separately managed accounts as a kind of new and improved mutual fund. Jerry Wade of Wade Financial Management in Minneapolis might be said to be in that camp. He says that lately, his team often explains the advantages of SMAs by talking first about the shortcomings of America's favorite investment vehicle.
"The mutual fund scandal of the past nine months has really accelerated the ability to communicate the benefits. It's very easy and simple for us to first ask a question of our client or prospective client: Have you heard about anything that's going on in the mutual fund business?" After that, he says, he and his colleagues go through what he jokingly refers to as a list of the seven deadly sins of mutual funds: soft money, shelf space payments, boards that don't represent shareholders, 12b-1 fees and other issues that have become more widely known since the timing scandals broke.
On the other side stands a group that sees the separately managed account as something fundamentally different from mutual funds. This camp often describes SMAs as a process, not a product, emphasizing the SMA's ability to tailor itself to the individual's needs. While the benefits of individual stock ownership are still discussed, these advisers tend to focus more on the SMA advisory relationship itself and the advantages of customization. Brenda Blisk of Blisk Asset Management in McLean, Va., for example, said that she liked to refer to SMAs as "privately managed accounts." She said it's a subtle distinction but one that emphasizes the product's personalized nature.
But do these stylistic differences matter? Isn't this debate a bit like the guys in the beer commercial who used to yell, "Tastes great! Less filling!" back and forth at each other? The answer is, yes and no. To a degree, any professional adviser will go over all benefits of SMA programs. Yet some argue that one or the other approach may actually be discouraging adoption rates.
Scott MacKillop, a consultant to the SMA industry based in Evergreen, Colo., is one who thinks that describing SMAs as a process may ultimately be bad for the industry. "If you were really going to talk about the separate account product itself, it would be a pretty easy thing to do," he says. "If you were just going to talk in terms of an institutional separate account, it's just a money manager managing money with a particular style," MacKillop said. But when it comes to selling SMAs in the retail market, "a lot of people have problems, either intentional or unintentional, in distinguishing between the product and the process."
"They're always trying to draw this distinction between mutual funds being a product and separate accounts being a process," MacKillop said, "which I think is kind of a slick little marketing ploy, but it's not really accurate." By going on about all the reporting tools and services that tend to be included in SMA programs now, he added, it can become difficult for the listener to walk away with a clear idea of the underlying concept.
The upshot is that MacKillop believes marketing SMAs as a customized, ultra-high-net-worth investment product may have actually slowed down adoption rates. It leads ordinary mass-affluent investors to think that the SMA is a product only for the super rich, he said. Second, it discourages advisers from using SMAs in the first place.
Overwhelming Barrier
"When somebody stands up in front of a crowd of financial advisers and says, a mutual fund is a product and separate accounts are a process, what happens in [an adviser's] mind? He's thinking, Well, I sell mutual funds. I know how to do that. This guy's telling me that the thing that I do every day when I go into the office, I'm not going to be able to do anymore.' That's such a big barrier for somebody to overcome, it just mystifies the whole idea," he says. The truth, he says, is that the process is fairly similar for separately managed accounts as for mutual funds. It begins with learning about the client's situation and crafting an asset-allocation model that meets those investment needs.
Yet some advisers say that a product-focused approach ignores some real differences inherent in SMA programs. Lewis J. Walker of Walker Financial Management in Norcross, Ga., agrees that much of the SMA process is largely similar to what advisers should have been doing all along, but in practice, he finds that among many advisers new to SMAs, there's a "tendency to want to take it and run with it like a product, to sell the hot-dot managers, to sell the easy story and not learn the process." He estimates that only 15% really know how to handle what he calls the investment management consulting process well. "There's growing interest in it," he says, "but they have to be trained how to do it."
And there are real differences in how well investment management firms train financial advisers on SMAs, Walker said. The biggest discrepancy is in training them to choose the right managers for the client. He recalls that some reps he's coached about SMAs get frustrated with the fact that their SMA platform doesn't automatically tell them which manager to choose. "I said, No, that's your job. It's your job to go in there and look,'" he said. Financial advisers need to "interpret that data and understand what is the difference between this manager and that manager, even though they both say they're large-cap core," he said.
One reason behind these variations in the way SMAs are sold may have to do in part not just with individual marketing preferences but in the way SMAs developed. Walker notes that back in the 1980s, SMAs were originally developed by E.F. Hutton as a vehicle for institutional money, the kinds of accounts where it was just money that was being managed, and professionals swapped charts with one another.
Later, some personal financial advisers began to adapt this structure for their clients, according to Walker. They saw that improvements in technology were making it possible to put together SMAs with lower minimums, and that this structure would work well in meeting their goal of moving toward fee-based compensation, he said. But that change added a new factor into the equation, the same factor that tends to gum up the works of most markets: people.
"Now you're dealing with people. And people have all these other problems that institutions and pension plans don't have," he said. "You've got screwed up kids, elderly parents, divorces, second marriages, all these psychographic issues of life-planning issues and how people think about money creeping in."
As a result, advisers began to need to combine investment management with financial counseling, which is why today's SMA process is so complex, Walker said.
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