If it ain't broke, why fix it? It's a frequently invoked reason for not adding managed accounts to an advisory practice. Unfortunately, that axiom does not allow for shades of brokenness, for the possibility that an advisory business might descend toward “broke” in increments that fail to set off the “fix it” alarms until it's too late.
After three years of pummeling by the bear market, it might just be time to examine how far your practice has fallen. For those who decide enough is enough, managed accounts could be part of the answer.
Managed accounts provide the discipline of an investment process used by institutional investors with billions at stake. But although they can introduce stability into an unstable advisory business, they aren't for everyone.
To make sure they're a good fit for you, consider the following key selling benefits. If your client base is likely to be receptive, perhaps it's time to begin migrating.
Business owners are often too busy to manage their money and are thus great candidates for managed accounts. Typically, their hands are so full with day-to-day concerns that they welcome third-party management of their money.
The plus side of these prospects is that they rarely have time to second guess the moves of a manager. But you must be extra careful to choose a client who is comfortable with the hands-off style.
Access to Expertise
Even clients with lots of free time can be candidates for managed accounts, so long as they are willing to admit that investment management isn't their strong suit. The good news for an advisor chasing this sort of prospect: Nothing humbles an investor like a bear market. The double whammy of the 1987 stock and bond market crashes sent investors scrambling for institutional-quality money management, and there could be a repeat performance in the works now.
But beware the “second-guessers.” A client focused on short-term results might try to micromanage the investment process out of fear of more losses. Though such behavior is understandable, this client is not a good fit.
Consistency of a Process
From the blueprint of an investment policy statement to the structural integrity of a multiple-manager solution, a managed account is a dependable home for your client's wealth. The process that managed accounts institute can prevent impulsive decisions that can severely damage a portfolio. After all, most of the market's gain is limited to a small number of randomly scattered days and if a portfolio misses those days because of a reactionary pullout, it will have a tough time prospering. From September 1981 through December 2002, for instance, the S&P 500 showed an average annual return of 8.9 percent. By being out of the market the 50 best days, that return drops to a net loss of 0.1 percent per year.
However, the process only works if the client is willing to submit to it. As one advisor puts it, “You need a sell discipline and most investors don't have one.”
Finding the Right Managers
There are many forces compelling investors to stick with brand-name mutual fund managers. The ratings systems, the name awareness and the media exposure granted many fund managers make investors comfortable with the idea of keeping money with them. But managed accounts have some selling points to counter the name-recognition factor. Primary among these is that many of the managers carry the stamp of approval of institutional clients, whose due diligence can exceed anything a consumer is likely to undertake.
No Conflict of Interest
Managed accounts remove the conflict of interest inherent in commissions-based businesses. Because the fees from managed accounts are based on the value of a client's portfolio, advisors sit on the same side of the table as the client.
This is a tremendous selling point, particularly in an investment industry in which suspicion about research and stock recommendations sits at an all-time high.
What makes a better narrative? “The more securities you buy and sell, the more I make,” or “The more money you make, the more I make.” There is one trap door in this sales pitch. Clients who push managers to invest for unrealistically high returns can compromise the entire process. Be careful not to take such clients on.
Affluent consumers increasingly expect products and services tailored specifically to their needs. The managed account process has three features that satisfy this demand: 1) Account blueprints or investment policy statements; 2) Tax-sensitive services that lean heavily on direct securities ownership; 3) The ability to exclude, within reason, specific stocks and even industries at the direction of the client. The last of these three has become very popular with socially conscious clients, as well as with rollover employees with a lot of company stock.
But even managed accounts have their limits. Clients who will demand excessive numbers of changes to their portfolio probably should be avoided.
Reminding a client that his account is being handled by institutional-caliber professionals is bound to make him feel confident. Prestige, of course, is no substitute for performance, so it's important to educate clients about the role of the manager and about the fact that the true investment superstars are the most consistent managers.
Once you've qualified which clients and prospects are best suited for the move to managed accounts, it's time to have the transition talk. More on that next time.
Steve Gresham is executive vice president, chief sales and marketing officer for the private client group of Phoenix Investment Partners, Ltd. He is the author of The Managed Account Handbook: How to Build Your Financial Advisory Practice Using Separately Managed Accounts. Contact him at [email protected]