For several years, Wells Fargo & Co. has been one of the many banking and fund companies trying to pitch separately managed accounts down-market.
But now the company is questioning whether the product, which offers tax advantages and an ability to customize investments to the investor's needs, will ever really prove suitable for the so-called mass affluent.
"Investors cannot get proper diversification with a separately managed account that has less than $300,000 in it," said Jerome Paolini, the director of investment consulting at Wells Fargo & Co. "You are not getting the proper diversification if you only have $100,000 in a separately managed account."
It's too early to tell whether Wells' change of heart marks the start of a trend or will eventually come to be viewed as an anomaly in the evolution of separate account sales. For now, Wells' view finds some support, but another big player, Bank of New York Co. through its Lockwood Advisors unit, believes the product is ripe for growth in the lower end of the affluent spectrum.
Thomas Perna, an executive vice president at Bank of New York, said that as the separately managed account industry grows and becomes more efficient the product would become more widely available. "This market can move downstream in a profitable way," he said; "it is just going to take some time."
Mr. Perna said Bank of New York's strategy is to expand the managed account business by developing third-party relationships. It will offer small financial services firms and banks separately managed account products to sell to investors, and it is up to each company to decide the account minimum.
Bank of America and Harris Bank's separate account customers must have at least $100,000 to invest, and those with more than $1 million are directed to the private bank.
And Wells itself sells its separately managed accounts to people with $100,000 to invest, but Mr. Paolini said the San Francisco banking company now is working to refine its product roster to suit both categories of customers. Wells offers multistrategy portfolios for investors with $150,000 of investable assets, he said, and in January started a separately managed account service, Wells Fargo Strategic Portfolio, for its wealthiest trust clients.
Mr. Paolini is scathing about companies that go too far down market. "Some firms will do a separately managed account for $50,000 or maybe $25,000, but that is not a separately managed account, that is a disservice to a customer," he said.
Wells began its multistrategy portfolio nine months ago. It lets customers invest in multiple investment styles in one account. Mr. Paolini said this product is aimed at mass-affluent investors and gives them the diversification in one account that could require three to five separately managed accounts of $100,000 each.
The product has accumulated $20 million of assets, he said.
Last month, the company started the Wells Fargo Strategic Portfolio, a separately managed account offered through Wells Fargo Private Client Services to trust clients. Mr. Paolini said Wells is learning that "managed accounts may be more appropriate for these customers than us managing the money or using mutual funds."
He said he expects to gather $1 billion of assets with the product this year. Wells, which started its separately managed accounts in 1998, is one of the biggest banking players in this market, managing 10,000 accounts with $1.4 billion of assets as of Dec. 31.
Chuck Widger, the president of Brinker Capital Management, said he agrees 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."
Brinker reported in a teleconference last Thursday that 500,000 separately managed accounts were created industrywide last year, with an average asset balance of $206,000.
Mr. Widger said managed accounts typically have assets of $1 million or more. They let investors own stocks directly, as opposed to owning part of an investment pool, as in mutual funds.
Christopher L. Davis, the president of the Money Management Institute, said separately managed accounts are attractive because fewer people want to invest on their own. "Pure managed accounts have been and will best serve investors north of $300,000," he said. "At lower levels, investors can be served well by mutual funds. The truly customized services are for the wealthy."
Dan Burke, an investment analyst at Gomez Inc. in Boston, said separately managed accounts traditionally are aimed at people with at least $100,000 to invest but that, through technology, some companies have become able to "intelligently and completely" offer these products to investors with as little as $50,000.
"If the private account business is going to grow, it has to move down market and go after investors that traditionally use mutual funds," he said. "This is just an effort to get into another distribution channel."
"From our standpoint, we get paid based on the number of accounts [sold], so we don't encourage one account size over another," said Bank of New York's Mr. Perna. "Each firm has to put these products together and determine their own break-even point."
Many small companies are letting mass-affluent customers buy separately managed accounts in the hope that the account will steadily grow, he said. "These smaller accounts will eventually become larger through market appreciation and asset growing as the individual grows," he said. "The key to success is time."
The Money Management Institute has reported that separately managed accounts declined slightly in 2002. Assets held in such accounts totaled $398.7 billion at Dec. 31, down 0.25% from the year earlier.
And Cerulli & Associates said that assets held in all 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.
