Ex-Citi Asset Management finds a fast-growing distribution channel for MDAs. Charles Schwab is bringing multiple-discipline accounts, or MDAs, to the 5,000-plus independent registered investment advisors (RIAs) associated with Schwab Institutional, its third-party custody and clearing platform. Schwab says the point of offering MDAs is, first, to help its advisors bring managed portfolios to their clients and, second, to help make independence more attractive to top brokerage-based advisors.

"Our MDA makes business more portable," says Jeff Carlin, head of San Francisco-based Schwab's separately managed account (SMA) business. "It's another sign [that] those looking to go independent can now do so."

Welcome mat

In other words, access to MDAs on an RIA-support platform means that brokers who so desire can make the leap to RIA status without having to give up the kind of sophisticated investment products they may have grown accustomed to using as brokers.

SMAs are single-account, single-style portfolios of investor-owned securities with investment minimums ranging from $50,000 to $1 million. The multiple-discipline account (MDA), provides different styles of a single asset class in a single account.

The principal selling-point of MDAs is that they can provide broader asset allocation for minimums than are generally available for a similarly diversified portfolio of SMAs. They also tend to streamline reporting, at least from the end client's point of view.

Though MDAs account for just 7% of overall retail SMA assets, they took a 32% share of 2005 flows into SMAs in 2005, according to Tiburon Strategic Advisors, a Tiburon, Calif.-based research firm and strategic consultancy.

Schwab's line on the use of MDAs as a means to lure advisors away from brokerage platforms doesn't go over too well with ClearBridge, which manages Schwab's MDAs. "Of course Schwab can run its business any way it likes," says a ClearBridge spokeswoman. "But we're not encouraging advisors to go anywhere."

This stipulation makes sense when you recall that ClearBridge is the name Legg Mason just gave the asset-management unit it acquired from Citigroup in 2005. SMA aficionados will recognize CAM - short for Citigroup Asset Management - as the biggest managed account manufacturer in the business; they'll also know that this prowess extends to MDAs, a product CAM originated in the early 1990s.

Fans of mergers and acquisitions meanwhile might recall that the business-unit swap that saw CAM become part of Legg Mason also included an agreement under which Citi's brokers - most of them working for the megabank's wirehouse unit Smith Barney - would distribute Legg Mason investment products through 2008. The deal also made Citi a substantial, though non-voting, shareholder in Legg Mason.

Inter-corporate sensitivities aside, ClearBridge says its deal with Schwab is big. "Whenever you're working with one of the larger players in the space you have to be excited," says Roger Paradiso, head of ClearBridge's MDA business.

Schwab's MDA Platform Strategy Style Asset class Minimum Dividend Large-cap growth Domestic equity $100,000 Appreciation Large-cap growth Domestic equity $100,000 Multi-Cap Growth All-cap growth Domestic equity $100,000 All-Cap Value All-cap value Domestic equity $100,000 All-Cap Growth All-cap growth Domestic equity $100,000 Large-Cap Core Large-cap core Domestic equity $100,000 Large-Cap Value Large-cap value Domestic equity $100,000 Large-Cap Growth Large-cap growth Domestic equity $100,000 MDA All-Cap Blend All-cap core Domestic equity $250,000 MDA Global All-Cap Global equity Other $300,000 MDA Diversified All-Cap All-cap growth Domestic equity $250,000

In fact Schwab runs the sixth-biggest retail SMA platform, coming in after the major U.S. securities units of Citi, Merrill Lynch, Morgan Stanley, UBS and Wachovia, according to Cerulli Associates, a Boston-based research firm.

And although these wirehouses' collective 73% share of a $700-million SMA industry make Schwab's $26.7- billion platform and 3.8% market share seem puny, Schwab's Carlin is quick to say that Schwab's SMA business grew 34% last year - well over twice the rate of growth for the SMA industry as a whole and blue streak next to mature wirehouse platforms like those of Smith Barney and Merrill Lynch.

Carlin gives another reason to suppose that Schwab's RIA-directed MDA platform may do well: advisors associated with Schwab Institutional use plain vanilla SMAs more readily than RIAs generally do. One in every five of the advisors who use Schwab's service platform had opened at least one SMA by the end of 2005. By that time only 9% of independent RIAs were using SMAs, says Tiburon Strategic Advisors.

Old school

For all of that, the MDA Schwab has chosen tointroduce isn't quite cutting edge. For one thing it isn't an "open architecture" offering. Instead the model managers are ClearBridge staffers and the overlay management - the process of aligning trades, managing cash flow and attempting to enhance the overall tax efficiency of portfolios - comes from Paradiso's group rather than an outsider overlay specialist such as IXIS' Managed Portfolio Advisors, Eaton Vance's Parametric and Placemark Investments .

According to the Financial Research Corporation, BISYS' Boston-based research affiliate, Schwab's one-management-firm offering is a "second-generation" MDA. First-generation MDAs are managed and distributed by the same company. Third-generation MDAs put unaffiliated managers under an affiliated overlay manager and fourth-generation MDAs put outside asset model under an unaffiliated overlay manager.

Schwab doesn't score points for coming first either. Fidelity's Registered Investment Advisors group has been offering a unified managed account (UMA) through third-party investment-platform provider Envestnet for the past six months, and Pershing, a subsidiary of the Bank of New York, has been doing the same for several years through its affiliate Lockwood Advisors and other turnkey asset-management platforms.

UMAs are similar to MDAs. They differ in blending different asset styles with different asset classes - stocks and bonds, say, or stocks, bonds and real-estate investment trusts.

And these service agencies have more than investment products up their sleeves as they compete with one another for productive RIAs on the basis of price and service rosters that include support and advice for breakaway brokers, practice management consulting and even business brokerage.

But Schwab says it's inherently cautious when it comes to bringing investment products to RIAs, subjecting innovations to a long process of consulting with associated RIAs.

"This is much simpler to use" than some of the other multi-sleeve SMA platforms in the marketplace, Carlin says of Schwab's MDA. "[It's a] strong, flexible, market-tested way for advisors to help their clients." -FWR

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