Wednesday, March 08, 2006

If proprietary funds can't make the cut, what's next?

Today the Riverwalk Golf Club in San Diego hosted the premier sporting event of the year for trust and wealth managers: the ABA Golf Tournament.

Tomorrow, golf bags and plus fours will be out of sight as the 2006 Wealth Management and Trust Conference settles down to business. As in recent years, one high-priority topic will be "open architecture." Clients don't like the idea of being tied to a bank's proprietary funds. Judging from the Conference program, neither do beneficiaries: sometimes they get mad enough to sue.

Citigroup and Merrill Lynch have already sold or spun off their proprietary funds. Major banks are expected to follow suit.

What's next? A recent Barron's cover story (only available to paid subscribers, alas) spotlights separately-managed accounts. Investors in separate accounts own actual stocks, not units of a comingled fund. Separate accounts offer tax-management advantages, plus the opportunity for some customizing, such as no tobacco stocks. SA's can be used as core holdings or, like hedge funds, as niche products.

As of Dec. 31, Barrons's notes, assets in retail separate accounts rose to $678 billion, 18% above the total a year earlier. That surge followed a 16% increase in 2004. Major wirehouses have been the big distributors of separate accounts thus far, but Barron's sees banks gaining a 10% market share by 2010.

Separate accounts tend to have high minimums, though they're coming down. And they tend to be pricey, with average annual expense of 1.7% by one estimate. But these days, even mutual-fund expenses approach 2% on average.

The lower cost alternative? Exchange-traded funds. Independent investment advisers are discovering they can use a handful of ETFs and low-cost bond funds to produce efficient portfolios simply. And annual expense is minimal. Barron's notes that the iShares Russell 3000 (IWV), a popular exchange-traded fund, has an expense ratio of 0.20%.

What's your institution doing?

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