In the August issue, I discussed the individually managed account (IMA) as a product that can be used alone or in concert with other products to implement a high-net-worth individual's investment plan. There are multiple channels that can effectively offer IMAs to the public. In fact, one concern among advisers in the past few years has involved a scenario in which IMAs could be ordered over the Internet, like so many books, videotapes or mutual funds.
In my opinion, this won't happen. Although the IMA is a product, it is also a complex investment. Further, IMAs are not easy sales, and complicated sales do not lend themselves to business-to-consumer marketing. When grappling with financially sophisticated issues, people require one-on-one support to feel confident in their decisions. Consider these points:
IMAs are usually a substantial portion of a client's investable assets (50% or more). Few investors will commit that level of assets without advice. Historically, IMA sales take at least one in-person presentation as well as several months of education through phone contact and literature sharing.
IMAs are complex because they have many customizable features. Each feature requires education, discussion and consideration, placing it within the context of the investor's overall strategy and financial plan.
To date, no one has been successful in delivering IMAs directly to investors through the Internet. Between 1998 and 2000, 14 dotcoms were founded on the intent to distribute IMAs directly to the consumer. Most of these companies are now out of business. The three or four that are hanging on have rewritten their business plans, trying now to deliver services through financial consultants. Also within the past year or so, a number of major investment banks announced plans to reach high-net-worth investors directly through the Internet with a wide array of products including IMAs. To my knowledge, those initiatives have been terminated due to the market downturn and the lack of success among companies in this area.
Internet as a Support
Internet distribution of IMAs has a dark future. But that doesn't negate IMAs' potential to serve as centerpiece or control accounts for high-net-worth investor portfolios. As IMAs assume that role, the Internet becomes the obvious choice for efficient, reliable information transfer among a client's team of advisers. When implementing and maintaining an overall investment strategy for a client, data must flow freely among all interested parties.
For example, a CPA usually doesn't get involved with investments until tax time. With reliable information about a client's IMA available online, the CPA could and should review the client's investments, looking for possible tax-management opportunities throughout the year, and intensively seeking tax-minimization strategies during the fourth quarter. The IMA manager could react to the CPA's ideas prior to year-end, significantly enhancing the value both the CPA and the financial adviser bring to the table.
Online distribution of IMAs has proven to be a nonstarter, but the Web is an excellent vehicle for managing IMAs. The Internet can be part of the solution to client demand for customized, flexible, tax-aware investment services. But it will not be the whole solution. It will always play a supporting role.
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].