Separate Account Management

290 Pages·2003·1.04 MB·English

by  Larry Chambers Ken Ziesenheim Peter Trevisani

J.K. LASSER PRO™
SEPARATE ACCOUNT
MANAGEMENT
AN INVESTMENT MANAGEMENT STRATEGY
DESIGNED FOR HIGH NET WORTH
INDIVIDUALS
Larry Chambers
Ken Ziesenheim
Peter Trevisani
John Wiley & Sons,Inc.

J.K. LASSER PRO™
SEPARATE ACCOUNT
MANAGEMENT
AN INVESTMENT MANAGEMENT STRATEGY
DESIGNED FOR HIGH NET WORTH
INDIVIDUALS
Larry Chambers
Ken Ziesenheim
Peter Trevisani
John Wiley & Sons,Inc.
Copyright © 2003 by Larry Chambers.All rights reserved.
Published by John Wiley & Sons,Inc.,Hoboken,New Jersey
Published simultaneously in Canada
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Library of Congress Cataloging-in-Publication Data:
Chambers,Larry,1947–
Separate account management :an investment management strategy
designed for high net worth individuals / by Larry Chambers.
p. cm.—(J.K.Lasser pro series)
Includes index.
ISBN 0-471-24976-9 (CLOTH:alk.paper)
1. Portfolio management. 2. Investments. I. Title. II. Series.
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Contents
Foreword v
Acknowledgments ix
PART I THE BASICS 1
Chapter 1 Introduction 3
Chapter 2 Separate Account Definitions 13
Chapter 3 The State of the Separate Accounts Industry 29
Chapter 4 Participants in the Separate Account Market 47
PART II THE PROCESS 59
Chapter 5 The Investment Management Consulting Process 63
Chapter 6 Start with Financial Planning 69
Chapter 7 Asset Allocation 85
Chapter 8 Understanding the Different Styles and Types of Managers 107
Chapter 9 Building a Core Investment Portfolio 117
Chapter 10 The Creative Process of Writing an Investment
Policy Statement 125
Chapter 11 Selecting Separate Account Managers 131
Chapter 12 The Control Account 145
Chapter 13 What Does a Separate Account Cost? 159
Chapter 14 Tax Management in the Separate Account 169
iii
iv Contents
PART III THE DELIVERY SYSTEM 181
Chapter 15 Converting Existing Clients 185
Chapter 16 Prospecting for High Net Worth Investors 205
Chapter 17 Compliance 223
Chapter 18 Leveraging Your Operations 231
Chapter 19 Understand the Employee Retirement Income Security Act
(ERISA) and Separate Accounts 239
Chapter 20 Look into the Future 255
About the Authors 263
Foreword
After decades of being pigeonholed,poorly defined,put down,and gener-
ally dismissed as a serious contender in the investment arena,the sepa-
rately managed account has come into its own.An investment vehicle that
has been up and running successfully since the mid-1970s is now achieving
mainstream respectability.More than that,separately managed accounts are
making a serious bid to become the core investment for high-net-worth indi-
vidual investors,a subset of the investing market that controls,or will soon
control,more than $40 trillion in investment assets.
Why has this happened? Why now? More important,what does it mean
for your industry? For about 25 years,individually managed accounts,offered
under a wrapped-fee pricing structure,were either ignored (the first 15 years)
or attacked (the next 10).From the late 1980s to the mid-1990s,these pro-
grams were the favorite punching bag for the financial media.Articles about
the so-called wrap fee and the wrap fee rip-off were the only press a managed
account program could get.The cry was almost always the same:“It’s too
expensive,you can get the same thing cheaper in a mutual fund!”
But companies, mostly the major wirehouses, with broad enough vision
(and deep enough pockets) continued to sponsor managed account pro-
grams,and quietly accumulated $100 billion in assets under management by
1995.Pretty small potatoes if you compare it with the trillions that were flow-
ing into mutual funds,but respectable,if you believed that managed accounts
were,and would continue to be,a niche product.
In the late 1990s, however, a mainstream shift began, powered by two
v
vi Foreword
important developments.Together, they have focused the attention of the
financial press, the investment professional, and the affluent individual on
separately managed accounts, literally tripling assets under management
between 1995 and 2000.
The Pricing
The first development was in pricing.In the bad old days,the most frequent
criticism of these programs was their cost.Typically marketed at a 3 percent
annual fee,the managed account was vulnerable to critics who insisted that it
was overpriced,and to those who wanted to know who was getting paid what,
and what they were doing to earn their part of the fee.Also,as financial advi-
sors migrated toward “fees”as a method of compensation,the “confined”fee
became problematic.
Of all the stones thrown our way in those years,this was the one that hit
hardest.The irony was that the wrapped fee,when it was instituted,was actu-
ally a better deal for clients than commissions.At the typical $0.85-per-share
commission rate of the 1970s,it didn’t take long for commissions to equal or
surpass the wrapped fee.And getting paid for their best advice—whether it
was to buy,sell,or hold—gave fee-based advisors the freedom andthe incen-
tive to recommend only what was in the client’s best interest. It was the
advice that generated revenues,not the transaction.But that was a hard con-
cept to communicate in an industry that had a long tradition of compensation
by commissions.
However, as transaction costs were forced down (and information was
commoditized) by technology and competition in the late 1990s,the spotlight
shifted to the value of unbiased advice.
As for pricing,in reality every program sponsor had a discount grid that
enabled consultants to lower the fee in competitive situations.These discount
capabilities were widely used,so we were getting bashed for a fee we hardly
ever collected.In the face of this reality,a few companies began to pare down
their pricing structures (see the section entitled “The Technology,”which fol-
lows) and unwrap fees,creating lower,unbundled fee schedules that plainly
identify each component of the separately managed account investment.
Now,investors can easily find out how much they pay for research and con-
sulting,how much the advisor is paid,how much the money manager gets,
and what they’re paying for clearing and custody.And,as we can see from the
recent flows of new money into separately managed accounts, unbundling
hasn’t hurt business a bit.
Foreword vii
Meanwhile, the investing public also began to understand that you
couldn’t get the same thing cheaper in a mutual fund.They realized that the
critical differences between mutual funds and separate accounts,the ability
to manage to an after-tax objective and the ability to customize the portfolio,
were of significant value when added to their investing program.The closer
separate account pricing got to average mutual fund expense ratios (never
mind trading costs),the more attractive separate accounts became.
The Technology
The second development is the impact of technology.Advances in informa-
tion management, analysis, and communication technologies, to name only
the most obvious,have driven enormous changes in the investment consult-
ing arena.Ours is an industry where you rise or fall on your ability to offer
custom service.
Technological advances let us compete for business on an exponentially
larger scale while maintaining the high level of customization and service our
clients expect,and I believe we’re just beginning to exploit the potential of
technology to broaden our competitive horizon.
It was only 20 years ago that quarterly presentations of portfolio perfor-
mance were done by hand.Fortunately,technology moved into this area long
ago, with ever-increasing economies of scale in the account maintenance
functions of separate accounts. In the same way that information manage-
ment technology has revolutionized so many business applications, it has
enabled our industry to do the trading, tracking, and reporting faster and
more accurately than ever.
The New Breed of Client
Bringing prices down and unbundling fees eliminated the biggest single
objection advisors encountered when they recommended separate accounts,
and technological advances have enabled us to offer separate accounts to any
investor who can benefit from them,introducing mass customization.
The long,strong bull market of the 1980s and 1990s triggered a phenome-
non called the Wealth Effect.The corresponding bear market has educated
investors about what they really need as an investment strategy.
Now,there’s a new breed of client with wealth,and that fact is going to rev-
olutionize the way we do business.These newly affluent investors are, on
average, younger and more sophisticated about investing. They have high