Separately Managed Accounts Appeal To Well-Off Boomers

For instance, 50% of SMA owners said access to the portfolio manager is extremely important in making purchase decisions, and nearly 70% cited the ability to meet/speak with the portfolio manager as a very important feature. In addition, more than 60% said visibility of fees, better communications and performance reporting, and visibility of holdings are very important.

Levi views these findings as an indication that SMAs encourage stronger client relationships, because the inherent communications foster greater client-advisor involvement.

Most managers do not speak directly with clients, but Levi knows of one manager who will speak with a client if the advisor is also present. In addition, the products provide website access to information about what the manager is doing and a phone hotline, too, he says. Legg Mason supports the communications aspect, too, by providing advisors with tools that help answer client questions about the portfolio manager's actions and decisions.

The SMA is really about a three-way relationship, between client, advisor and portfolio manager, Levi concludes. Through this relationship, the parties build trust over the long term, he says.

For advisors who come into SMAs from an insurance background, that should be comfortable territory, suggests Perlman, the researcher. Insurance advisors are skilled in needs-based selling and meeting client goals and objectives, he says. Since such skills are what boomers and other investors value in the SMA, he believes more insurance advisors should be selling SMAs.

Pace, the advisor, recalls that there was a time when only the big national wirehouses could provide the support services that SMAs require. But now, SMA platforms (firms) exist that have the same tools as those wirehouses, he says. This is making it possible for other advisors to get into the market.

Because he favors using SMAs only for high-net-worth clients, Pace does not expect to see many insurance agents enter this market soon. "The typical agent does not deal with high-net-worth people," he explains.

But those agents who do have wealthy clients "have got to have SMAs in order to compete effectively," he maintains. "If a client has, say, $20 million, you're not going to use mutual funds," Pace says. "At least show the SMAs, that you have them."

But Pace also cautions against using SMAs in every situation. In some cases, the fees can be too high, he explains. Also, if the client wants to invest $200,000 to $500,000, using SMAs might not provide enough diversification for the allocation to be effective, he says. "That would be terrible; the client would not get the best fee or the best of breed in asset classes."

Pace says there can be "very little transparency," too, between the published SMA returns and the clients' own returns. "Each manager is different and doing different things," so it happens, he says.

In addition, the advisor's job is to coordinate the managers, Pace says. "You have to tell them what to sell, for instance."

Some insurance specialists may see the SMA as a competitive threat, Perlman allows. He thinks they should instead view it as an opportunity.

In today's financial environment, he explains, SMAs are fostering creation of a "relationship practice." It's comparable to the consultative approach that most life insurance agents used before life insurance became as commoditized as it is today, Perlman contends. Now, agents can apply their traditional skills to the new SMAs.

SMAs give advisors more opportunity to manage money, Perlman adds. They also give clients more opportunity (and reason) to talk to the advisor and investment manager–which Perlman says boomers want to do. That leads to more needs-based selling, more talking about goals and objectives, and less focus on performance, he says.

Levi says the Legg Mason survey found that not all advisors are yet aware of the consumer's need for communication.

Instead, 50% of the advisors identified "historical manager performance" as an extremely important benefit, and 48% said "operational support" is extremely important. And, while 69% of SMA owners said "manager access" is very important, only 48% of advisors said the same.

Such disconnects could get in the way of advisors meeting client needs with SMAs, Levi suggests. His advice to advisors: Address what is important to SMA clients and explain the perceived benefits of SMAs from the client's perspective.