Individually Managed Accounts and When to Use Them
Len Reinhart, CEO, Lockwood Financial Robert Jazwinski, CEO, JFS Wealth Advisors
Question:
•What is an IMA? •What is a Separate Account? •What is a Managed Account? •What is a Wrap Account?
Answer:
•An Extension of Mutual Fund Investing
Let’s Compare Them
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So Far, Mutual Funds Have Won the Battle for Assets
Mutual Funds $7+ trillion Individually Managed Accounts $360 billion
But Who Will Win the War for the High-Net-Worth Investor?
Why Have Mutual Funds Been the Investment of Choice?
• Discretionary Professional Management • Diversification • Liquidity • Cost Efficiency • Plentiful Data, Information, Opinions • Ease of Administration • Low Minimum Account Size
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How Do Individually Managed Accounts Compare?
Discretionary Professional Management?
The Same!
How Do Individually Managed Accounts Compare?
Diversification? Very Similar
• Mutual Funds • IMAs
100-300 holdings 30-60 holdings
• Once You Have More than 10 Securities, You Are
92% Correlated to the Market.
Source: Modern Portfolio Theory and Investment Analysis, Third Edition
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How Do Individually Managed Accounts Compare?
Liquidity? Very Similar
• Can Move to Cash Same Day • 3-Day Settlement
How Do Individually Managed Accounts Compare?
Cost Efficiency? The same
$500,000 Account Manufacturing Expenses IMAs1 Mutual Fund2 Money Manager Fee Other Expenses Brokerage Costs .50% 0.60% .40% 0.80% .30% 0.30% 1.20% 1.70% IMAs Offer Economies of Scale for the Investor RIA Consultants Charge an Additional Fee
Lockwood Financial
1 Source:
2 Source: Morningstar, Inc.; 2002- All Domestic Equity Funds
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How Do Individually Managed Accounts Compare?
Plentiful Data, Information, Opinions? Current Advantage to Mutual Funds
IMAs are catching up - Mobius, Effron, Morningstar - Program Sponsors - Supermarkets - Press
How Do Individually Managed Accounts Compare?
Ease of Administration? Advantage to Mutual Funds
IMAs
- Money Manager contracts - Suitability requirements
- Proxies and quarterly reports Regulations Have Changed
- Trade confirmations can be suppressed - Proxies and Quarterly Reports can be turned off
New Managed Account Technology Now Available
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How Do Individually Managed Accounts Compare?
Low Minimum Account Size? Advantage to Mutual Funds
Mutual Funds $100 to $10,000 IMAs $50,000 to $100,000 This Can Be a Marketing Positive to the High-Net-Worth Investor
So, What Are the Advantages of Individually Managed Accounts?
“Customization”
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So, What Are the Advantages of Individually Managed Accounts?
Tax Efficiency
Defined Benefit Syndrome
So, What Are the Advantages of Individually Managed Accounts?
Ability to Accept Low Cost Basis Stock
Mutual Funds Are Purchased with Cash Some IMA Managers Specialize in Diversification of Low Cost Basis Stock
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So, What Are the Advantages of Individually Managed Accounts?
Ability to Integrate with Other Investments
Year-End Planning Issues Harvesting Tax Credits
So, What Are the Advantages of Individually Managed Accounts?
Ability to Customize Around Other Investments
Fulfillment Managers Will Build Portfolios Around Existing Client Positions
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To Correctly Service a High-Net-Worth Investor, You Need to Have IMAs in Your Toolbox
FEATURE Discretionary Professional Management Diversification Liquidity Cost Efficiency Plentiful Information Ease of Administration Minimum Account Size Tax Efficiency Low Cost Basis Stock Investment Integration Customization ADVANTAGE Same Very Similar Very Similar Same Mutual Funds Mutual Funds Mutual Funds IMAs IMAs IMAs IMAs
Top Third Party Managed Account Platforms
Separate Account Assets Firm Name
June 2002 ($MM) June 2001 ($MM) Change %
Market Share
June 2002 % June 2001 %
1. 2. 3. 4. 5. 6. 7. 8. 9.
Charles Schwab & Co. Lockwood Financial Services EnvestnetPMC Brinker Capital London Pacific Advisors Advisorport Greenrock Research Oberon Financial Technology WrapManager
9,894.00 7,590.00 2,909.08 2,900.00 2,200.00 1,761.81 1,030.30 500.00 423.00 44.30 42.00
8,605.00 8,650.00 2,986.08 2,700.00 1,300.00 711.33 812.20 30.00 N/A 44.40 35.00
15.0 -12.3 -2.6 7.4 69.2 147.7 26.9 1,566.7 N/A -0.2 20.0
33.8 25.9 9.9 9.9 7.5 6.0 3.5 1.7 1.4 0.2 0.1
33.3 33.4 11.5 10.4 5.0 2.7 3.1 0.1 N/A 0.2 0.1
10. Quantum Asset Management 11. TD Waterhouse Institutional Services
Source: Bloomberg Wealth Manager, November 2002
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Top Third Party Managed Account Platforms – Services Rendered
Tax Lot Accounting In-Kind Transfers AssetClient RiskClient Allocation Tolerance Assessment Presentations Programs Manager Search Database AIMR Consolidated Compliant Performance Performance Performance Reporting Reporting Reporting On Demand
Advisorport Brinker Capital Charles Schwab & Co. EnvestnetPMC Greenrock Research Lockwood Financial Services London Pacific Advisors Oberon Financial Technology Quantum Asset Management TD Waterhouse Institutional Svcs. WrapManager
Source: Bloomberg Wealth Manager, November 2002
Selling Points for Large Institutional Accounts
Investment Policy
Modern Portfolio Theory Style Diversification Asset Allocation and portfolio design alternatives Continuous due diligence on select money managers Easy to make changes Lower costs than comparable mutual funds
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Selling Points for Large Institutional Accounts
Fiduciary Oversight
Independent advisor Independent due diligence on money managers Multiple professional money managers Independent custodian
Selling Points for Large Institutional Accounts
Client Communication
Professional presentation of portfolio design Money manager research Economic and capital markets research Portfolio and manager performance reports
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Selling Points for High Net Worth Clients
Investment Policy
Modern Portfolio Theory Style Diversification Asset Allocation and portfolio design alternatives Continuous due diligence on select money managers Easy to make changes Lower costs than comparable mutual funds
Selling Points for High Net Worth Clients
Tax Planning
More control over year end tax consequences Tax lot accounting Ability to work with low basis stock - Hedging strategies - Completion strategies Itemized deduction for investment management expenses
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Selling Points for High Net Worth Clients
Client Communication
Professional presentation of portfolio design Money manager research Economic and capital markets research Portfolio and manager performance reports
JFS Wealth Advisors Investment Management Process
We position ourselves as an Independent Advisor Complete data gathering and prepare a Financial Plan
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JFS Wealth Advisors Investment Management Process
•For individual high net worth clients, we prepare a comprehensive personal financial plan addressing: –Cash Management and Budgeting –Insurance Needs –Investment Needs, Policies, Strategies –Income Tax Planning –Retirement Planning –Estate Planning
JFS Wealth Advisors Investment Management Process
•For institutional clients, we prepare a critique of the investment management process: –Investment Policy –Investment Manager Search and Selection –Investment Manager Monitoring –Portfolio and Manager Returns Monitoring –Re-Balancing Portfolio to Investment Policy Constraints –Control of Costs –Fiduciary Oversight and Related Factors
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JFS Wealth Advisors Investment Management Process
Review Recommendations and Give Action Plan Implement and Follow Up Continuous Review and Monitoring
Comparison of Expenses $1,000,000 Example Portfolio
IMA
MUTUAL FUND MSTAR CATEGORY AVERAGE
A – US Large Growth B – US Large Value C – US SMID Core D – Foreign
$250,000 ALLOCATED TO EACH
1.13% 1.13% 1.18% 1.18%
1.55% 1.38% 1.91% 1.62%
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All IMAs Are Not Created Equal
•There Are No Standard Operating Procedures •Buyer Beware!
Observations on IMA Evolution
•Managed Accounts Have Historically Been Sold, Not Purchased
–This May Be Changing
•The Industry is Currently Sponsor-centric
–Custody –Clearing –Execution –Gatekeeper –Administration –Distribution
•This Is Contrary to Virtually Every Other Packaged Financial Services Product
–Variable Annuities –Hedge Funds –Real Estate Investment Trust –Mutual Funds
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Product Vs. Product
•Historically: A Process •Future: A Product •A One-Product Solution for a HNW Investor Is Not Possible •Big Five Coming Around •Not a Fad •No Gimmicks
Top Five IMA Challenges
80 70 60 50 40 30 20 10 0
Fe e
Note: The Y axis represents the percentage of managers polled. Source: FRC
P
er fo rm an ce
Re po rti ng
Pe rs on ne l
P
re ss ur e
O ps
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What Should You Look for in a Sponsor?
#1 Superior Operations and Service
What Should You Look for in a Sponsor?
#2 #3 #4 #5 Fiduciary Status Depth of Research and Portfolio Design Training/Marketing/Sales Support Price
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What Should You Look for in a Money Manager?
•Quality Investment Discipline •Ability to Accept Low Cost Basis Stock •Tax Loss Harvesting •Tax Lot Optimization •Fulfillment Capability
What Should You Look for in a Money Manager?
•Security Blocks •Y/E Gain/Loss Request •Efficient Trading for the HNW •Communications
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IMAs Go Mainstream
•IMAs are 25 Years Old – But Still in Infancy •IMA Will Be Core Investment Vehicle of Every HNW Investor •Industry Rankings Will Change Dramatically •Brand Identities Will Be Established
IMAs Go Mainsteam
•Best Execution •Portability •Scaleable Operations •Standard Operating Procedures •Explosion of Product Offerings
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IMAs Need to Be In Your Arsenal of Investment Solutions!
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