The separately managed account industry continues to grow, but the investment vehicle has yet to truly take off.
SMAs grew 17 percent, from $528.7 billion in the second quarter of 2004 to $620 billion in the second quarter of 2005, according to a recent report from the Money Management Institute (MMI), the national organization for the separately managed account and wealth management industries. Since the second quarter of 2003, assets under management have grown 40 percent.
But the long-brewing potential of SMAs is much greater, say researchers: “There are several obstacles facing the industry right now,” says Jean Sullivan, managing principal at Dover Financial Research, a Boston-based firm that assists MMI in its reports and publications. “Once these hurdles, such as channel diversification, financial advisor penetration and systematic operational issues are overcome, we believe the industry will expand even greater.”
According to Chris Cossentino, communications director at MMI, penetration is 10 percent or less among advisors. Operationally, firms struggle to streamline back-office systems that aren't set up for fee-based accounts; meanwhile, the industry suffers from a lack of standardization. “It's the little things, basic standards like where a name and address go on new account form that are still issues,” says Cossentino.
But the situation is improving: “We're seeing shifts in our favor. In terms of distribution, more banks and insurance firms are getting involved, and independents like Schwab and Lockwood continue to make SMAs available to their people,” he says. Cossentino says retiring baby boomers will also help managed money's growth, and that IRA rollovers into managed accounts are the biggest growth area in the business right now. He thinks retiring reps are likely to contribute to the shift as well, as younger advisors who were raised in managed money take over accounts of baby boomer reps.
So far, the wirehouse channel dominates the managed account realm. The large firms control 77 percent of SMA assets — down from 80 percent in 2003 — and were responsible for 77 percent of net new sales in 2004. The competition continues only to inch up on the large firms — MMI and Dover estimate nonwirehouse firms experienced 12 percent growth in 2004, compared to 7 percent at the wires. According to Dover and MMI, 54 percent of the $79 billion in asset growth in 2004 was from net new sales.