NEW YORK-The separately managed account business will flourish, as many firms that have not previously offered SMAs will decide to do so over the next few years. But while this is likely to boost assets and the number of investors in SMAs, competition will become fierce. That was the message of speakers at The Money Management Institute's Managed Accounts Solutions conference here last week.

Competition is already heating up, as wirehouses, insurance companies and banks are rapidly joining asset management firms to launch SMAs. Fifteen percent of assets under management at wirehouses were in separately managed accounts two years ago. Today that number is close to 22%, with expectations of further growth, said Darlene DeRemer, a partner at merchant bank Grail Partners of New York.

"Firms need to have strategic initiatives in place and to think of the managed account business in the context of broader trends," said Jeb Doggett, a partner with Casey, Quirk & Associates of Darien, Conn.

SMA assets are projected to increase from $700 billion today to $1 trillion by 2010, according to Chicago market research firm Mintel. Distribution of SMAs continues to be mostly dominated by wirehouse giants Merrill Lynch, Morgan Stanley, Smith Barney, UBS and Wachovia, which collectively control 80% of the market.

Trends driving changes in the SMA industry include the major demographic shift caused by the retirement of the 77 million Baby Boomers. As they leave the workforce, Boomers will migrate toward funds that mitigate risk, generate income, protect principal or guarantee at least modest returns. The retirement system is strained, and people have concerns about not getting as high of an income from their Social Security check as they thought they would. Also, defined benefit plans are dwindling more and more each year, placing more responsibility on individuals to prepare for retirement.

Amid such uncertainty, consumers are actively interested in purchasing financial products that will not only limit their exposure to market risk, but also address inflation, taxes, healthcare and other risks, according to a report, "The Asset Management Industry 2010," by McKinsey of New York.

"This presents a distinct challenge to asset managers, as the business models of most are still rooted in accumulation mode, with the primary focus on products, not customer needs," the report notes.

"Product innovation is less about innovative investment strategies and more about innovative ways to package products together to meet the needs of consumers," said Frank Coates, president and chief executive officer of Coates Analytics Group of Chadds Ford, Pa. This is keeping prices under pressure and increasing competition, he said.

While managed account providers are expected to bring new products to market, they are also likely to tweak and package existing products differently.

Going forward, distributors of separately managed accounts will expect their brokers to form stronger relationships with intermediaries, and, in turn, investors, experts said. Firms are looking for product development dialogue to build proprietary products for their financial advisers, Doggett said. There will be a multi-style type approach, and ideas for custom solutions will come from intermediaries.

Mergers and acquisitions among SMA firms, which have picked up lately, will continue. But before forging ties with another investment firm, companies need to make certain that their philosophies align on business strategies.

"Success is not translated when the deal is announced, but it depends on long-term effects," said Todd Reit, a managing director at UBS of New York. When buying an asset management firm, a company is acquiring people, and the most critical element is that those people get along and share the same vision as the acquiring company, Reit noted.

There are a lot of drivers when acquiring a firm. The firm being acquired should add value and complement or fill gaps in the existing business model. Also, the acquired firm's products should align with those the acquiring firm already offers, and the sales force of both companies needs to become versant in all the new product offerings and be qualified to sell them.

SMAs will also experience competition from exchange-traded and mutual funds, speakers said. ETFs' impact on the business will be somewhat destructive in certain sectors, such as large-cap funds, and will crunch other sectors because they are a low-cost substitute, DeRemer said. However, there is also a benefit to clients since ETFs generate alpha, and can be mixed into a client's portfolio, she said. Mutual funds are also winning back appeal now that the trading scandals are largely behind them and many are lowering fees.

Investment firms looking to enter the industry face the decision of whether to buy or develop their own SMA platform, and that decision depends on the unique character of the firm. There is a certain level of commitment required to be successful; firms should also assess current products available to make sure they will fit with and complement an SMA platform, Doggett said.

Factors such as operations, geography, regulation and succession planning also all come into question, and firms should be prepared, Reit said.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.