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
1
So Far, Mutual Funds Have Won
the Battle for Assets
Mutual Funds Individually
Managed Accounts
$7+ trillion $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
2
How Do Individually Managed
Accounts Compare?
Discretionary Professional Management?
The Same!
How Do Individually Managed
Accounts Compare?
Diversification? Very Similar
• Mutual Funds 100-300 holdings
• IMAs 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
3
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 .50% 0.60%
Other Expenses .40% 0.80%
Brokerage Costs .30% 0.30%
1.20% 1.70%
IMAs Offer Economies of Scale for the Investor
RIA Consultants Charge an Additional Fee
1 Source: Lockwood Financial
2 Source: Morningstar, Inc.; 2002- All Domestic Equity Funds
4
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
5
How Do Individually Managed
Accounts Compare?
Low Minimum Account Size?
Advantage to Mutual Funds
Mutual Funds $100 to $10,000
IMAs $50,000 to $100,000
This Can Be a Marketing Positive to the
High-Net-Worth Investor
So, What Are the Advantages of
Individually Managed Accounts?
“Customization”
6
So, What Are the Advantages of
Individually Managed Accounts?
Tax Efficiency
Defined Benefit Syndrome
So, What Are the Advantages of
Individually Managed Accounts?
Ability to Accept Low Cost Basis Stock
Mutual Funds Are Purchased with Cash
Some IMA Managers Specialize in
Diversification of Low Cost Basis Stock
7
So, What Are the Advantages of
Individually Managed Accounts?
Ability to Integrate with Other Investments
Year-End Planning Issues
Harvesting Tax Credits
So, What Are the Advantages of
Individually Managed Accounts?
Ability to Customize Around Other Investments
Fulfillment Managers Will Build Portfolios Around
Existing Client Positions
8
To Correctly Service a High-Net-Worth
Investor, You Need to Have IMAs in
Your Toolbox
FEATURE ADVANTAGE
Discretionary Professional Management Same
Diversification Very Similar
Liquidity Very Similar
Cost Efficiency Same
Plentiful Information Mutual Funds
Ease of Administration Mutual Funds
Minimum Account Size Mutual Funds
Tax Efficiency IMAs
Low Cost Basis Stock IMAs
Investment Integration IMAs
Customization IMAs
Top Third Party Managed Account
Platforms
Separate Account Assets Market Share
June 2002 June 2001 Change June 2002 June 2001
Firm Name ($MM) ($MM) % % %
1. Charles Schwab & Co. 9,894.00 8,605.00 15.0 33.8 33.3
2. Lockwood Financial Services 7,590.00 8,650.00 -12.3 25.9 33.4
3. EnvestnetPMC 2,909.08 2,986.08 -2.6 9.9 11.5
4. Brinker Capital 2,900.00 2,700.00 7.4 9.9 10.4
5. London Pacific Advisors 2,200.00 1,300.00 69.2 7.5 5.0
6. Advisorport 1,761.81 711.33 147.7 6.0 2.7
7. Greenrock Research 1,030.30 812.20 26.9 3.5 3.1
8. Oberon Financial Technology 500.00 30.00 1,566.7 1.7 0.1
9. WrapManager 423.00 N/A N/A 1.4 N/A
10. Quantum Asset Management 44.30 44.40 -0.2 0.2 0.2
11. TD Waterhouse Institutional Services 42.00 35.00 20.0 0.1 0.1
Source: Bloomberg Wealth Manager, November 2002
9
Top Third Party Managed Account
Platforms – Services Rendered
AIMR
Client Risk- Asset- Manager Consolidated Compliant Performance
Tax Lot In-Kind Client
Tolerance Allocation Search Performance Performance Reporting
Accounting Transfers Assessment Presentations Programs Database 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
10
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
11
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
12
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
13
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
14
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
MUTUAL FUND
IMA MSTAR CATEGORY
AVERAGE
A – US Large Growth 1.13% 1.55%
B – US Large Value 1.13% 1.38%
C – US SMID Core 1.18% 1.91%
D – Foreign 1.18% 1.62%
$250,000 ALLOCATED TO EACH
15
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
16
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
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Note: The Y axis represents the percentage of managers polled.
Source: FRC
17
What Should You
Look for in a Sponsor?
#1 Superior Operations and Service
What Should You Look for in a
Sponsor?
#2 Fiduciary Status
#3 Depth of Research and Portfolio Design
#4 Training/Marketing/Sales Support
#5 Price
18
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
19
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
20
IMAs
Need to Be
In Your Arsenal of
Investment Solutions!
21