Jun. 10–Custom mutual funds, created with software, attract wealthy investors — and vehement critics.<\/p>\n
The hottest trend in the financial-services industry has plenty of foes. Vanguard founder John Bogle attacked it in a speech last year as overpriced and oversold.<\/p>\n
Financial advisers, the intended beneficiaries, circle it warily as well, put off by claims that computer technology can substitute for their judgment.<\/p>\n
“The last thing financial advisers want is to have a computer science guy right out of college telling them what to do,” said Sang Lee, a research manager in Boston for Celent Communications, a financial-services consulting firm.<\/p>\n
“It’s a long way from taking off,” he said.<\/p>\n
So why are brokerages, banks, insurance companies and software houses spending millions on investing technology to accommodate so-called separately managed accounts?<\/p>\n
The short answer is because their rivals are.<\/p>\n
“You’re going to have to have something to remain competitive,” said James W. Brinkley, president of Legg Mason Wood Walker Inc., the Baltimore-based regional brokerage.<\/p>\n
Managed accounts are custom mutual funds tailored by financial advisers to meet the specific needs of their clients.<\/p>\n
For an investor who has an overly large stake in his company’s stock, for example, a managed account could structure the rest of the portfolio to avoid that stock and others in its industry.<\/p>\n
Many managed-account providers use wealth-management software to flag stocks that are appreciating more rapidly than other investments, and recommend combinations of sales to restore a client’s original investment mix while minimizing taxes.<\/p>\n
Separately managed accounts “are one of the few places financial advisers can control taxes,” said Len Reinhart, chairman of Lockwood Financial Group, of Malvern, a managed-account pioneer.<\/p>\n
The rich are happy to pay for these services and take them for granted. Money managers hope technology will drive down costs enough to attract more ordinary clients.<\/p>\n
Managed-account investors pay slightly more for this custom approach than mutual-fund investors. Financial Research Corp. estimates that managed-account clients pay annual fees equal to 1.9 percent to 2 percent of their account balance. Mutual funds are typically less expensive but do not come with advice.<\/p>\n
Financial Research assumes a minimum account balance of $150,000. Many experts said the minimum should be $250,000 to $500,000, although some firms are pushing managed accounts as little as $50,000 to invest — a level where some say little customization is possible.<\/p>\n
Charles Widger, a managed-account pioneer, has little patience for such cost comparisons. “The real value is created by the advice,” said Widger, chief executive officer of Brinker Capital, of King of Prussia. “Who cares about” fractional percentage points?<\/p>\n
However, the more customized managed accounts become, the less anyone can predict how well they will perform.<\/p>\n
Even so, the managed-account industry is a rare bright spot in the bear market. At the start of this year, investors held $399 billion in two million managed accounts, or roughly 10 percent of the money held by mutual funds, according to Financial Research.<\/p>\n
The Boston research firm expects the industry to reach 5.3 million accounts and $930 billion in assets in 2006.<\/p>\n
The industry’s growth “is going to come at the expense” of the mutual-fund industry, said Phil Owings, president of the wealth-management division of SunGard Data Systems Inc., a Wayne-based processing and software conglomerate.<\/p>\n
Vanguard Group, of Malvern, studied managed accounts but decided against entering the market. Delaware Investments manages separate accounts for its parent, Lincoln National Corp., and other sales organizations.<\/p>\n
Brokerage firms hold 70 percent of the managed-account assets today, said Mike Evans, a Financial Research vice president. Stockbrokers embraced the accounts as a way to move their clients to compensation based on management fees rather than transaction fees.<\/p>\n
Banks, insurance companies and independent advisers are joining in, Evans said. “You can pretty much outsource it,” he said.<\/p>\n
Brinker and Lockwood are leading providers of outsourcing services. Meanwhile, scores of wealth-management systems are under development by financial-services companies and technology firms, many of which are based in the Philadelphia area.<\/p>\n
The technology providers also pitch their systems as freeing financial advisers from account administration and other mundane, back-office chores.<\/p>\n
“They’re focused too much on the back office and not enough on their clients,” said Gregory Horn, chief executive of Advisorport, a Plymouth Meeting start-up, which offers a Web-based management system.<\/p>\n
Lockwood and Brinker contract with institutional money managers such as Delaware Investments to handle the mini-mutual funds. They use computer networks and the Internet to keep everyone in the loop.<\/p>\n
Technology is also taking over more of the adviser’s role. Brinker recently paired with eMoney Advisor, a Paoli-based provider of wealth-management technology.<\/p>\n
Some big companies have taken notice of the growing business and have been either acquiring firms in it or signing strategic alliances. Last month, SunGard bought London Pacific Advisory Services, a Sacramento, Calif., managed-accounts provider.<\/p>\n
Advisorport teamed up with PFPC Inc. in October to offer managed accounts using mutual funds as building blocks. Based in Wilmington, PFPC is a processor and recordkeeper owned by PNC Financial Services Group Inc.<\/p>\n
Bank of New York, a securities processor, bought Lockwood in August.<\/p>\n
The combined entities are automating the financial-advice business from start to finish, from compiling the initial sales presentation to generating ongoing account statements.<\/p>\n
SEI Investments Co., of Oaks, pioneered automated account systems designed to lighten the administrative burdens of financial advisers, using mutual funds rather than managed accounts.<\/p>\n
The SunGard\/London Pacific combination allows financial advisers to access prospective clients’ various investment accounts and pull together financial profiles in a matter of keystrokes.<\/p>\n
“What used to take three weeks to complete, they can now do in two hours,” said Jack Waymire, London Pacific’s president.<\/p>\n
The software gets mixed reactions, Waymire reports. “Advisers ask, ‘Because it’s so fast, how do I justify my fee?’ ” he said. “The answer is that you don’t show the client how fast it is.”<\/p>\n
Financial advisers are leery for other reasons. Peter Hoover, of Berwyn, tells prospective clients he does not use a computerized, “cookie-cutter” approach.<\/p>\n
If a client presents a unique situation, he said, “sometimes you can’t put a square peg in a round hole. It’s all about being as customized and personal to the client as you can get.”<\/p>\n
For his part, Voorhees financial planner David Garfield wants to see more history. “The jury is still out” on managed accounts, he said. “Decisions about investment management need to be made over 10-year periods.”<\/p>\n
Indeed, because managed accounts are unique, there is no easy way to rank managers or grade performance in the way that mutual funds develop track records and brand names.<\/p>\n
“I don’t think it is a question of brand names,” said Brinker’s Widger. “It’s a question of investors deciding they can’t do it themselves, and they are right.”<\/p>\n
Regardless, competitive pressure pushes technology to the fore. Lincoln Financial Advisors just rolled out an integrated managed-account system — after considerable effort, said Gary Dorfman, a managing director.<\/p>\n
“The challenge is taking all these disparate technologies and integrating them so they run smoothly,” he said.<\/p>\n
At Lincoln Financial Advisors, the advice arm of Philadelphia’s Lincoln National Corp., technology underpins an effort to grow the organization eventually from 2,000 planners to 3,000 to 4,000, Dorfman said.<\/p>\n
Lincoln’s rivals “are all looking at creating some sort of wealth-management system,” Dorfman said. “How do you differentiate? I think we have a head start.”<\/p>\n
—–<\/p>\n
To see more of The Philadelphia Inquirer, or to subscribe to the newspaper, go to http:\/\/www.philly.com<\/p>\n
(c) 2003, The Philadelphia Inquirer. Distributed by Knight Ridder\/Tribune Business News.<\/p>\n
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