The Emergence of the Control Account

All of a sudden, everybody gets it. After years no, decades of being pigeonholed, poorly defined, put down and generally dismissed as a serious contender in the investment arena, the individually managed account (IMA) has come into its own. An investment vehicle that has been up and running successfully since the mid-'70s is now achieving mainstream respectability. More than that, IMAs are making

All of a sudden, everybody gets it. After years — no, decades — of being pigeonholed, poorly defined, put down and generally dismissed as a serious contender in the investment arena, the individually managed account (IMA) has come into its own. An investment vehicle that has been up and running successfully since the mid-'70s is now achieving mainstream respectability. More than that, IMAs are making a serious bid to become the core investment for high-net-worth individual investors — a subset of the investing market that controls, or will soon control, more than $40 trillion in investment assets.

By the end of 1995, the entire IMA industry had accumulated about $100 billion in assets under management. Pretty small potatoes if you compared it with the trillions that were flowing into mutual funds, but respectable, if you believed that IMAs were, and would continue to be, a niche product.

This year, Cerulli & Associates, which tracks assets in managed money programs, calculates that $275 billion is currently under IMA management, and projects that the total will more than double, reaching $650 billion, within four years. Why has this happened? Why is it happening now? And what does it mean for our industry?

I believe the primary reason is that the investing public now understands the critical differences between mutual funds and IMAs. Investors see value in the ability to manage to an after-tax objective and in the ability to customize the portfolio.

I also believe that the individually managed account of directly owned securities will quickly become the centerpiece of the high-net-worth individual's investment strategy. I base this last prediction on my belief that the future will bring increased access, flexibility and tax-efficiency to the IMA industry.

Even now, many tax-aware IMA money managers use optimizers to manage for tax-efficiency within each client's portfolio. They calculate, account by account, whether a contemplated sale is “tax wise” for that investor. If the upside of the replacement stock isn't enough to overcome the tax consequences of the sale, they don't make the trade in that account.

They also do extensive year-end tax planning work, managing the investor's overall tax liability by taking gains or harvesting losses within the portfolio to offset losses or gains realized in other investments. Soon, what will really solidify the IMA's place in the affluent investor's investment plan will be its ability to enable ongoing tax-management strategies across the investor's entire spectrum of assets.

A typical high-net-worth individual's financial picture includes a variety of investments, some liquid, some illiquid; and some volatile and others quite stable. In the not-too-distant future, tax-aware money managers will be able to take input from investors' other assets and use the flexibility of the IMA to manage around them throughout the year. Instead of working within the portfolio for most of the year, then having a flurry of activity at year-end to orchestrate the overall tax picture, they will be able to take a holistic approach to tax management all year long.

This capability is going to cement the IMA firmly in each investor's strategy. Individually managed accounts that have the flexibility to bob and weave, taking gains and harvesting losses to meld with events or activity in other investments, will become the control accounts of the high-net-worth individual investor's total portfolio. It's been a long time coming, but the IMA is here to stay.

Len Reinhart is president, CEO and chairman of Lockwood Financial Group, an investment management consulting firm with offices in Malvern, Pa., New York and Dallas. He also serves on the board of the Institute for Certified Investment Management Consultants. He can be reached at [email protected].

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