BOSTON -- "Stop congratulating yourself."

That was the sobering message Chip Roame had for members of the separately managed account industry at the Money Management Institute's annual convention here last week.

In what was a refreshing departure from the usual rhetoric about asset growth at previous MMI functions, Roame, a managing principal at Tiburon Strategic Advisors, gave his constituents a good dose of tough love. Roame's fiery comments were meant to stir the pot and get money managers and sponsors thinking about how to better understand their clients' needs.

Specifically, he stressed that Baby Boomers, those age 39 through 57, should be the focal point of their efforts. Not only do they make up the bulk of the U.S. population, but Boomers are also in the stages of life in which they hit their peak earnings and savings marks. With many Boomers heading into their retirement years, wealth transfer and liquefaction will become increasingly important, while investments will matter less.

"You'll be missing the boat for the next 20 years if you're not focused on the Boomers," Roame said.

In his opinion, catering to their needs requires an approach that is more life-event oriented as opposed to returns-oriented. In other words, one that can help them adjust their retirement goals as they embark on new phases of life beginning with marriage, then having children, paying for their kids' college tuition, possibly divorce, increased wages, children's marriage, the sale of homes, retirement and eventually disability or death of a spouse.

Additionally, he warned attendees not to lose perspective on their client base, noting that consumers account for two-thirds of all the assets in the nation, with $17 trillion of investable assets and $46 trillion in total assets. He believes that $17 trillion will grow to $30 trillion by 2010. Breaking it out by market segment, moderate and high-net-worth consumers, or those with $100,000 to $5 million to invest, control more than half of those assets.

"We know very little about our consumers. You've got to know the consumers better," Roame said. "Understanding consumers' rapidly evolving needs may become the biggest MMI member challenge, as opposed to the issues of products, pricing, distribution, operations, regulatory [issues] and membership that receive today's focus." For example, multiple-style portfolios and unified managed accounts are great steps toward addressing consumers' needs, he acknowledged, but they are not a panacea.

Roame went on to talk about the competitive playing field that now exists due to the growing number of entrants into the SMA business. "Pay attention to other channels that are booming," he cautioned. Discount brokerage and RIAs are the fastest-growing channels as they continue to chip away at market share, which has historically been dominated by the wirehouses and regional brokers.

Still, fee-only financial advisers are capturing more client assets than leading full-service and discount brokerage firms. TD Waterhouse fee-only financial advisers took in more than double in annual net new assets than Merrill Lynch.

Managers and sponsors should focus on the demographic where there are the most people, which in this case would be the 104 million households that have less than $1 million in investable assets. There are only 250,000 households that have $5 million or more in investable assets.

In terms of drawing in new assets, Roame said that niche marketing works best. Essentially, investors want a customized experience. An example of this, Roame said, is Cleary Gull of Milwaukee, which offers investment services for commercial airline pilots. The firm uses pilot terminology such as "engineer", "safety" and "stay on course" and has specialized services for individual airline employees like the American Airlines Super Saver 401(k). The firm also has several ex-pilots on staff to maintain pilot relationships.

When looking at the fee-based business as a whole, SMAs clearly dominate the market, representing $449 billion of the estimated $869 billion in fee-account programs, according to Tiburon. But while fee-accounts continue to gain traction at wirehouses, they still only represent a small slice of the pie, and SMA assets come from a small group of advisers. On top of that, three-quarters of full-service brokers use just one to three managers for each client. And only 18% of full-service broker clients actually customize their managed accounts. So there's some significant room for improvement.

Roame told attendees that more investment products are unnecessary because there are actually enough products out there already. Rather, what is truly important is applying four key aspects to the product: financial planning, investment consulting, ongoing management and fiduciary responsibility. It is the process, not the product, that needs to be streamlined, he said.

He also warned of the dangers of hedge funds and the importance of asking whether they are really a good idea for the client. "Don't get caught up in the hedge fund trend," Roame said. Their volatility and downside risk, lack of transparency and pricing complications "rape and pillage" investors

Another point he made was that SMAs are sold and not bought in that many investors don't have a clue what they are or where they fit into an investment strategy. The industry needs to do a better job of explaining their benefits. In addition, he said that while the SMA business is experiencing solid growth, it remains a very concentrated market dominated by a handful of brokers.

Fee-based financial advisers are beginning to question the SMA model in favor of low-cost alternatives such as index funds and exchange-traded funds. In order to stay competitive, the industry must figure out a way to pare fees and expenses, Roame said. As for discount brokers, he believes they will continue to "thrive," warning, "Don't kid yourselves, wirehouses."

With respect to competition from banks, he said they were like "shooting fish in a barrel." Roame illustrated that point by sharing an experiment his firm conducted when it sent one of its young analysts into three major banks to open up a trust account. At Wells Fargo, the rep from the bank didn't know what a trust was and told the analyst to come back later when a more experienced individual was there. That person never showed up. Next, the Tiburon analyst went to Bank of America, where he was again met with a rep who did not understand what the client was trying to do and referred him to a 1-800 number on the wall. Fed up, he then made his way to J.P. Morgan, where he was told that his multi-million dollar purse was not enough to open a trust account.

The shopping experiment illustrates the opportunity that exists out there and how some players are failing to capitalize on it. Understanding and servicing the clients' needs has to be the top priority, Roame argued, adding that firms need to go after not just the super-affluent segment, but also the affluent and high-net-worth segments. "[They] are the sweet spot for most advisers," Roame said. He further added, "Not all rich people have the same needs."

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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