They appeal to wealthy people, or to lazy investors: in either case, they are becoming more and more popular on the US market. Separately managed accounts (SMAs) have started to appear in the retirement plans of some employers.
Typical SMAs allow investors to customise portfolios of stocks, bonds and cash and are managed by professional money managers according to the client’s instructions. They have been gaining momentum among pension plan sponsors since Enron, because they may be a solution to fiduciary concerns: in fact, in SMAs every employee’s investment decisions are assisted by a personal adviser and the company can not be considered responsible for the results. In particular, SMAs are appreciated by baby boomers who are approaching their 60s, are seriously thinking about their retirement and love personalised products.
“The retirement market is a very big part of the business,” confirms Norm Nabhan, managing director of Smith Barneys consulting group, and in charge of SMAs. According to the Money Management Institute (MMI), at the end of 2003, 45% of the $500bn (e403bn) in SMAs assets were held in individual retirement accounts (IRAs), with 25% of net flows into SMAs coming from IRA roll overs.
Three benefits make SMAs more attractive than the regular 401(k) plan: taxation, customisation and transparency. Firstly, they allow use of losses to offset capital gains in stocks and bonds; the IRS has announced that clients can deduct SMA fees from an IRA account, as long as the client pays for the fee. Secondly, customisation permits clients to tailor their portfolios to avoid overweighting in sectors or to exclude stocks for social reasons, such as weapons manufacturers. Thirdly, SMAs are transparent: clients and advisers can always see the entire portfolio, trades and fees included. Fees, they are higher than a 401(k) invested in indexed funds: they vary between 125 and 250 basis points, and can go as low as 1% depending on assets.
Fees are the biggest problem: a typical SMA was available only to people with large assets, $100,000-500,000. At this level, SMAs can be introduced in very few pension plans, because under ERISA, the US pension law, a company retirement plan must give all participants equal access to all options, otherwise it is “discriminatory”. But thanks to technological advances, some money management firms have reduced their minimum investment requirements to as low as $50,000.
Portfolio manufacturing systems make the difference. They take in rankings of securities, accepted risk levels, expected return goals, tax considerations, and then their sophisticated software, ‘optimiser’, can customise solutions for thousands of accounts against model portfolios - standard equity and bond portfolios, ETFs and mutual funds - that track a benchmark.
Among the portfolio manufacturing technology players in the US, one of the most successful and innovative is Financial Engines, founded by Nobel Prize-winning economist William F Sharpe. Set up in 1996 as an on-line advice system for retirement purposes – where people could put their current portfolios (including non financial investments), personal information (time horizon, risk level, goals, spouse’s situation) and see which scenarios were more likely to happen (going broke or living happily).
In October 2003, Financial Engines used the same technology to offer the personal asset manager programme which not only suggests a retirement strategy, but translates it into a unique model portfolio and manages it, permitting clients to intervene and discuss it with a professional. Now Financial Engines has more than $1bn in AUM in this managed account programme. A retirement plan sponsor can contract with Financial Engines to roll out managed accounts either directly or through its plan provider.
In 2004, Financial Engines managed-account programme was adopted by the US mutual fund giant Vanguard, whose spokesperson explained: “Financial Engines is really doing a customised portfolio. It’s not like a lot of advice tools that will put people into one of six cookie-cutter portfolios. This is using technology to offer a number of portfolios that are unique to individuals.” Vanguard charges and additional fee for the service, on top of its very low mutual fund fees.
In February, JPMorgan Retirement Plan services announced that it selected Financial Engines as its managed account provider.
And so for 401(k) participants with dozens of mutual funds to choose from, this kind of service offers one more choice: “The choice not to choose,” say managers with Financial Engines.

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