SMAs Poised for Further Growth

Citigroup Asset Management says that Separately Managed Accounts (SMAs) are poised for a growth spurt, despite the fact that only one of five investors currently takes advantage of their benefits, which includes tax optimization and account customization.

SMAs are a fast-growing financial product because the professionally managed portfolios of individual securities can be fixed to meet specific investment needs. SMA assets totaled $620 billion during the second quarter of 2005, which is a 40% increase since the same time in 2003, said the Money Management Institute.

"Both advisors and investors believe that SMAs offer powerful benefits, but they don't necessarily agree on where the greatest value lies," said Peter Cieszko, head of U.S. Retail and High Net Worth at Citigroup. "Advisors tend to focus on product features, but investors are much more interested in the SMA as a tool that facilitates financial planning and communication."

Among advisor-producers surveyed, 41% said that SMAs make up half of their sales. Another 73% of producers and 33% of non-producers say that their gross sales of SMAs will be higher than those of mutual funds within five years.

But Citigroup concluded that investors are not taking advantage of the tax efficiency and account customization of SMAs, which could mean that investors favor them for their communication benefits, such as access to investment managers, performance reporting, and portfolio visibility.

Advisors see the value of SMAs differently, as only 12% of advisor-producers feel "client access to manager" is really important. But 50% of advisors say that "historical manager performance" is really important. Advisors are also less likely than investors to consider fee visibility as an important SMA advantage.

"This has had an enormous impact on how advisors can build their business with clients," Cieszko said. "Superior products with strong benefits will always be the foundation of their practice - but this research clearly suggests that the way to grow their business is the consultative, high-touch approach.

SMAs, however, are definitely scoring more points with investors.

"One of our more striking findings is how little 'negative baggage' seems to be associated with SMAs among owners," said Dr. Brian Perlman, who directed the research. "In research we do on other financial products, we frequently see investor skepticism and sometimes second thoughts. SMA owners clearly are satisfied customers. More than 90% of SMA investors are satisfied with their SMA investment, and nearly half say they are satisfied."