The marketplace for model portfolios is booming as more banks add unified managed accounts to their product menus.
Model portfolios — investment recipes bought from third-party asset managers and implemented by bank trust departments and others to develop unified managed accounts — are on course to reach $385 billion of assets within the next five years, according to a report from the Money Management Institute and Dover Financial Research LLC.
The assets stood at $91 million in June, says the report, which came out in November. That five-year figure would amount to 48.8% of the total advisory market for separately managed accounts, up from 11.5% in June, the report says.
In model portfolio programs, a third-party asset manager sells its investment model to so-called overlay managers within bank trust departments and elsewhere. The overlay managers can tailor the models to minimize taxes or avoid investments that clients find objectionable. All of that is made easier through the use of unified managed accounts, which put a range of investments on one platform.
Unified managed accounts can contain a range of investments.Separately managed accounts, are similar but are limited to wealthy investors, because one account is required for each investment type.
Alois Pirker, a senior analyst at the research firm Aite Group LLC, said unified managed accounts, which hold 15% of the separately managed account market's assets, could grow to a 35% share by 2010 or even earlier. Large banks including U.S. Bancorp, Bank of America Corp., and SunTrust Banks Inc. started their own unified managed account platforms this year.
Mr. Pirker said banks like unified managed accounts more than separately managed accounts because they put more fiduciary control within the bank rather than leaving decisions to outside managers.
Model-based unified managed accounts let outside managers make investment recommendations without executing the trades. "Banks had been cautious about SMAs because of fiduciary responsibilities," Mr. Pirker said.
But it was mainly the outside managers that appealed to Bremer Trust of St. Paul, which started offering model portfolios in the summer of 2005, said Joel Reimers, the Bremer Financial Corp. unit's chief investment officer.
"In the old days, when we went to meet a prospect, all we had was proprietary funds," Mr. Reimers said. "Now we can say we have an open architecture approach."
Since summer 2005, Bremer Trust has accumulated $140 million of assets in a program from SunGard Data Systems Inc. of Wayne, Pa. Bremer uses unified managed accounts for clients with $1 million or more of assets, and mutual funds for smaller clients.
Trust and wealth management units traditionally managed clients' assets in-house. "My sense is that, not too far into the future, if you don't" use model portfolios, "you'll be left behind," Mr. Reimers said.
Model portfolio programs are already used for more than 60% of assets in unified managed accounts and related offerings called multidiscipline products, according to the Money Management Institute, a trade group for the managed account business.
In the last four years the number of asset managers participating in model portfolio programs more than doubled, to 214 from 90, according to the institute. Those firms range from fund companies to institutional money managers.
Bremer Financial, an $8 billion-asset bank with trust assets of $2.5 billion, started using model portfolios with its move to open architecture. "We had been in the manufacturing business, with core equity mutual funds," Mr. Reimers said of the two funds, no longer extant, that together had assets of about $200 million. "We realized that probably wasn't going to carry the day, when the rest of the world was going to best-of-class."
Bremer's overlay approach will not necessarily improve its profits but is helping lure new money and provide better service, he said.
"We think it makes them a more lasting client and builds a more solid relationship," he said. "And it gets us some at-bats with prospective clients that we probably wouldn't have gotten in the past."
SunGard's bank trust clients have taken to unified managed accounts and the model portfolios more than separately managed accounts,, said Dave Ferry, SunGard's director of market strategy. "They were not as quick to adopt separate account programs for fear of handing off to a third party," he said. "They are much more interested in an insourced approach."
Model-based portfolios are still in the early stages of acceptance, Mr. Ferry said. Less than 10% of SunGard's clients uses unified managed accounts, which the company rolled out five years ago, he said.
