Despite the skepticism of some banks about selling separately managed accounts down-market, a small Denver investment adviser has announced the start-up of a separately managed account program with a minimum investment of $25,000 - and it has bank distributors signed up.
Curian Capital LLC, a unit of the London insurer Prudential PLC, announced Thursday that it would offer Curian Custom Style Portfolios to individual investors. Each portfolio includes 10 to 20 style-specific money managers and typically holds a portion of up to 500 securities.
"We think that investors with $25,000 in assets fall right into a bank's sweet spot," said Allan Chiulli, an executive vice president at Curian. "It is crucial to provide financial institutions with a product that best serves these customers."
Mr. Chiulli said Curian began selling the managed account program last Monday. Through its staff of 70 distributors, his company will look to create partnerships with financial institutions, individual registered investment advisers, broker-dealers, and certified public accountants. He said Curian has agreements with regional and community banks, which he declined to name, to distribute the program.
Bank executives have said that, in order to achieve effective diversification and asset allocation, people cannot invest less than $300,000 in a managed account. In February, Wells Fargo & Co., which had built its business by offering managed accounts to people with $100,000 to invest, said in an interview that proper diversification requires an investment at least three times that large.
Chuck Widger, the president of Brinker Capital Management, said that properly diversifying small separately managed accounts is difficult.
"Our minimum account size is around $300,000. It is hard to do a good asset allocation for less than $500,000," he said. "Some providers are downsizing the average account. I hope they can provide the asset allocation required to get customers through this difficult period in the market."
Mr. Chiulli said that Curian's new product provides the same diversification whether someone invests $25,000 or $2.5 million. Curian accommodates small accounts by fractionalizing stocks to as little as 1/100,000th of a share.
"Clients with $25,000 have the same needs that larger clients have," he said. "I don't disagree that $300,000 to $500,00 is adequate for some. If you add in fixed income, some companies require $2 million for a managed account. But by rounding lots with fractional shares, we can spread 500 to 900 securities across 10 to 20 managers. This gives us the flexibility for lower minimums."
Executives and analysts remained skeptical, however. Christopher L. Davis, the president of the Money Management Institute, a trade group, said managed accounts best serve investors with more than $300,000.
"At lower levels, investors can be served well by mutual funds," Mr. Davis said. "The truly customized services are for the wealthy."
Brinker said that 500,000 separately managed accounts were created industrywide last year, with an average asset balance of $206,000. Mr. Widger said, though, that managed accounts typically have more than $1 million of assets.
Executives said banks have been slow to get into managed account sales because they are concerned about investing large amounts in order to launch managed account programs while their salespeople remain nervous about selling fee-based products.
Industrywide, Cerulli & Associates, a Boston consulting firm, said assets held in fee-based managed accounts (including separately managed accounts, proprietary consultant programs, mutual fund advisory programs, fee-based brokerage accounts, and portfolio manager programs) declined 7.5% last year, to $721.6 billion.
"Everyone believes they need to be involved in offering fee-based products," said Darren McGuire, a vice president at First Tennessee Bank in Memphis. "They know they have to get on board or be left behind. But still there are concerns because it is hard to take that plunge into fees."
"This is a shift in culture," he added. "Be prepared; it takes a lot of time to develop this."
Mr. Chiulli agreed that moving into fee-based business can be challenging. But he said that, in order to develop more points of distribution, Curian has created a Fee Advance Program under which it pays advisers annual fees up-front in order to encourage sales.
"Banks want recurring revenue, but their current model fluctuates with the market," he said. "It is a tough market. [Advisers] want a new story for their clients."
Kevin Daniels, an analyst in Boston, said a big opportunity for banks lies in the mass-affluent market. If banks want to make a serious dent in managed account sales, he said, they must go down-market.
"Managed accounts have to move down-market after mutual fund investors if this business plans to grow," Mr. Daniels said. "The evolution is natural."
