E.F. Hutton&Co. marketers introduced wrap accounts back in 1975, during the ,70s bear market, when product innovation was hardly commonplace.
By Alexandra Alger
December 2000
Institutional Investor Magazine
E.F. Hutton & Co. marketers introduced wrap accounts back in 1975, during the ,70s bear market, when product innovation was hardly commonplace. Providing investment advice and professional money management for a fixed annual fee, wrap accounts, now marketed as “managed” or “separate” accounts, have never been more popular.
E.F. Hutton is long gone, of course, but wraps have had an amazing life. Assets in these accounts should hit $700 billion by year-end, nearly triple what they were in 1997, according to Cerulli Associates. The increase is especially welcome at a time when mutual fund asset growth is slowing. For the first nine months of this year, managed-account assets grew by 29 percent for the five biggest players: Merrill Lynch & Co., Morgan Stanley Dean Witter, PaineWebber, Prudential Securities and Salomon Smith Barney.
Wraps offer investors the flexibility to create their own portfolios while avoiding the built-in capital gains liabilities that come with traditional mutual fund accounts. Most programs require a $100,000 minimum investment, but some, including two of Salomon Smith Barney,s, will accept $50,000. While the wire houses dominate the managed-account business, with a 70 percent market share, some upstarts are coming on strong. Malvern, Pennsylvania’s Lockwood Financial Group, which uses 1,000 independent financial planners to bring in business, has amassed $8.5 billion in assets in just four years. Wells Fargo & Co. has garnered $1 billion in assets in its two-year-old managed-account program, which gives clients access to 40 outside money managers. Online vendors, such as WrapManager, offer do-it-yourself managed accounts.
Says Christopher Davis, executive director of the Money Management Institute, a Washington, D.C., trade group: “We stand at a delicious convergence. Investors want something better than mutual funds, and producers want to convert clients from transaction-based to fee-based services.” Davis predicts that insurers and accounting firms will be the next to fit managed accounts into their portfolios of client services.
Meanwhile, mutual fund companies, mindful of the slowing growth of their industry, are scrambling to get into the managed-account business. A few, such as Aim Management Group, Dreyfus Corp. and MFS Investment Management, have already launched their first investment services through a small number of brokerages, and most of the big firms are expected to follow suit.
Mutual fund executives see managed accounts as nothing less than a fundamental shift in how individuals are investing their money. “Managed accounts are only a fraction of the size of the mutual fund market, but the growth rates are flip-flopping,” says Mark McMeans, president of Aim Private Asset Management, a new division that will run the Houston-based fund family’s managed-account business. “The mutual fund industry is mature, and we think this might literally be where the industry is going.”
At Boston-based MFS, executives recently noticed that they were losing potential clients to managed accounts. Bill Taylor, who is heading up a new MFS unit that will handle managed accounts, says that brokers were telling them: “We,re looking at fee-based programs for our clients. We wish you had something like that.”
The competition is tough and will probably get tougher. Account fees can only go down from here, experts say. Posted rates can be as high as 3 percent of assets annually, but clients typically pay something less than 2 percent, depending on the size of the account and the client-broker relationship, says Paul Fullerton, an analyst at Cerulli Associates. Clients with a few million dollars to invest might pay not much more than 1 percent, less than the 1.42 percent expense ratio for the average domestic equity mutual fund.
After managed-account fees are divvied up among all the players involved, money managers are left with roughly 50 basis points, far smaller than the typical expense ratios for mutual funds. However, according to fund companies, managed accounts should be less costly to run than mutual funds, in large part because managed accounts do not confront the same set of regulations. Regardless of how profitable the business is, says Russ Alan Prince, a management consultant in Shelton, Connecticut, fund companies have to be in the game. Says Prince, “They don,t have a choice.”
