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April 02, 2002 at 07:00 PM
Since their introduction in the early 1970s, separately managed accounts have changed very little. The tools for selecting separate account managers and the technology for offering the accounts to investors have evolved significantly, but the basic product has remained much the same. Now, that is changing–in a way that could reshape the separate account industry.
Change has come in the form of the “Multiple Discipline Account” or MDA. Citigroup, which debuted it more than 5 years ago, owns the term “Multiple Discipline Account” so the Boston-based consulting firm of Cerulli Associates suggests others call it a multiple style account, or MSA. Meanwhile, Checkfree, the largest provider of back-office systems to the managed account industry, is using the term “multiple strategy portfolio” or MSP. To avoid taking sides in the name game, we’ll refer to them simply as multiple manager accounts (MMAs). But whatever you call it, this new breed of separately managed account is suddenly attracting a horde of new players, including wirehouse and regional brokers and firms serving independent financial advisors.
An MMA is a single, separately managed account that incorporates multiple investment styles, each managed by a different investment manager. The managers can be affiliated with a single investment organization, or they can be unaffiliated managers invited to participate in the MMA by the product sponsor. The portion of the account allocated to each style, and the managers included in the account, are predetermined by the firm sponsoring the MMA. So, in effect, MMAs are prepackaged, multistyle, multi-manager portfolios maintained within a single brokerage account.
The best way to underscore the significance of the MMA is to contrast it with the traditional way separate accounts are used to construct portfolios for investors. Today an advisor using separate accounts to build a portfolio must go through the effort of developing a proper asset allocation strategy for the client and then selecting managers to implement the strategy from a list that might easily include 40 to 60 managers and up to 100 products. The advisor might receive some help from the firm sponsoring the separate account program, but, under the best of circumstances, the process can be time-consuming and is often overwhelming for those unfamiliar with the world of separate accounts. Once managers are selected, the client opens up a separate brokerage account for each manager selected and funds that account with at least the amount necessary to satisfy the manager’s minimum account requirement. This is typically in the range of $100,000 to $250,000 per manager.
Lowering the Bar
From the client’s perspective, MMAs have some distinct advantages over the traditional approach. First, to achieve proper portfolio diversification using separate accounts, a client must have significant assets in order to meet the minimum account requirements of each manager. Experts differ, but most would say that an investor should have between $500,000 and $1 million to build a well-diversified portfolio using separate accounts. MMAs allow a client to achieve a reasonable level of diversification for significantly less: The minimum required to open an MDA account at Citigroup is a comparatively modest $100,000; it runs up to $150,000 at some other firms.
This means a client with a smaller account can also benefit from reduced volatility and more consistent performance, which should help the client stick with his or her investment program over the long term. Clients also benefit because an MMA is managed using a single brokerage account rather than a series of separate accounts for each manager. This means less effort to open an account, far less paperwork going forward, and cleaner performance reporting. The result is less confusion and fewer administrative headaches for the investor.
From the advisor’s perspective there are advantages, too. Advisors new to separate accounts are spared asset allocation and manager selection decisions that they may be uncomfortable making. In addition, an increasing number of advisors are looking for ways to focus more attention on developing and maintaining client relationships and less on technical investment issues. For such advisors, MMAs present an opportunity to delegate asset allocation and manager selection decisions to experts. But even experienced advisors who are not ready to relinquish control over such important matters as asset allocation and manager selection in all cases may find MMAs ideal for clients with accounts in the $100,000 to $500,000 range. That is because MMAs still offer the tax and customization benefits of separate accounts, but in a more streamlined and efficient package. So advisors can still offer separate accounts to clients whose account size does not justify the significant effort that can be involved in developing a portfolio of separate accounts tailored specifically to the client’s needs.
MMAs have one more advantage that may prove important as this product evolves. Because of the way MMAs are managed, trades from each manager who runs a portion of the account are sent through a central “overlay portfolio manager.” The overlay manager can review the trades and coordinate overall portfolio activity. This can ensure that one manager is not selling a security that another is buying. The overlay manager can also control duplication in the holdings of the managers in the account. This centralization of trading activity presents the possibility for a higher level of tax management than has existed in the industry to date.
Will Managers Adapt?
There are some negatives associated with the MMA concept. Some advisors, particularly those who are schooled in selling “process” rather than “product,” may look down their noses at MMAs as a prepackaged, cookie-cutter solution. It’s also not entirely clear yet how managers will modify their investment processes to fit within the MMA environment. A manager that is used to managing $500,000 separate accounts today may have to adjust his approach when he begins receiving $30,000 for its portion of an MMA. Also, because trading activity is centralized in an overlay portfolio manager, managers are now one step removed from the trading process. The impact of this is not fully known. There are other operational and back-office issues as well that still remain to be worked out. And at this time only the Citigroup organization has significant experience in sorting through them. These issues are likely to be addressed as the industry gains experience and develops new technologies to handle the challenges.
So how do you find out more about MMAs for your clients? After all, MMAs are still a bit of a scarce commodity. Although Citigroup pioneered the MMA concept, it has only recently captured the attention of the rest of the industry. Perhaps that is due to recent reports of the success the product has generated within the Citigroup organization. Cerulli Associates recently reported that Citigroup has garnered more than $10 billion in assets in its MDA product using its proprietary investment management capabilities. Citigroup’s sister organization, Salomon Smith Barney Consulting Group, also has a version of the product, called a diversified strategic portfolio, or DSP. It uses outside money managers, including J.P. Morgan Fleming Asset Management, Alliance Capital Management, Putnam Investments, Strong Capital Management, and TCW Investment Management.
