Wall Street Gets Personal

Brian O'Connell

BioPharm International, BioPharm International-06-01-2004, Volume 17, Issue 6

Separate accounts. Personal portfolios. Call them what you will. In financial circles, they're hot.

While canvassing my editor at BioPharm International for story ideas for this month, we bandied about a few topics — things like speed-to-market issues for biopharmaceutical firms or dissecting the DNA chip market (don't worry, they're both in the pipeline).

But in my meanderings about Wall Street and talking to my key contacts, I'm sensing a trend in the industry where, just like in the hotel, airline, and car rental industries, people are beginning to demand more control over their product choices.

These choices have huge ramifications for the biopharmaceutical industry, as investors are finding new ways to plow more money into industry firms.

But, I'm getting ahead of myself.

The key is that Wall Street is all about options. You like mutual funds? Fine. The industry has more than 8,000 from which to choose. Individual stocks? Say no more. There are almost 2,800 on the New York Stock Exchange, not to mention those on Nasdaq and the over-the-counter stocks. But what if you don't want to invest in mutual funds or individual stocks? What if you want something different?

A CUSTOMIZED PORTFOLIO

What if, for example, you wanted to build your own "personal portfolio" of your favorite biotechnology and pharmaceutical companies and manage them yourself, or have a financial advisor step in and do that for you?

Well, Wall Street aims to please, and now you can. The financial services industry has come up with a hybrid investment vehicle that combines the best elements of mutual funds and individual stocks. The vehicles — called separate accounts or personal portfolios — let you create your own portfolio of 20 to 50 stocks, and you can pay as little as $30 per month or up to thousands of dollars per year. In other words, you can build your own de facto mutual fund.

Like mutual funds, folios invest in a broad selection of stocks, instead of just a handful, thus providing investors with a lower level of risk for the same expected rate of return or the potential for a higher expected rate of return for the same level of risk.

Unlike mutual funds, personal portfolios have additional benefits. Gone are minimum investment requirements and expense ratio bills. Gone is frustration over lack of input in a fund's selection. Gone is the ethereal sense of detachment that comes with not actually owning the stocks.

By combining model portfolios with advice, trade execution, and favorable fee schedules, the separate account firms are appealing to several segments of the individual investing community: disenchanted mutual fund investors, beaten-up stock pickers, frustrated capital gains taxpayers, cost-conscious index fund investors, technology-savvy Internet investors, and others. Because personal portfolios have properties that mitigate at least some of the negative aspects of these segments, they are gaining traction very quickly. In the process, they're chipping away at mutual fund industry assets.

CHIPPING AWAY AT THE FUND INDUSTRY

With $7 trillion in "investable" assets, mutual funds aren't going away. Still, evidence shows that separately managed investment accounts are already chipping away billions of dollars in business from the fund industry. According to Money Management Institute in Washington, DC, investors poured $450 billion into separate accounts in the third quarter of 2003 alone. Companies such as Merrill Lynch, FOLIOfn.com, E*Trade, Quick & Reilly, and Charles Schwab, say they give investors the diversification advantages of mutual funds and more control over fees and taxes, as well as the added bonus of direct stock ownership.

The self-styled fund industry is growing. Merrill Lynch has seen success in marketing its personal investment advisory service. FOLIOfn, a leading provider of advanced portfolio management technology, says that more than 800 financial institutions worldwide are using its portfolio technology. "We think our financial advisory customers see personal portfolios as real portfolio management tools," says Ron Kuykendall, vice president of marketing and communications at FOLIOfn. "Advisors can customize client accounts through our folio software. For example, if their client wants to manage his taxes better, our software allows them to do that. Or if the client does not want tobacco stocks in her folio, advisors can simply block such companies out of their clients' accounts." Kuykendall adds that financial advisors can manage up to 500 client personal portfolios, trading in and out of the portfolio daily and providing mass customization in the process. "Both advisor and client get what they want," he adds. "Personal portfolios are really a technological tool on the institutional side and a brokerage account on the retail side."

"Self-styled" mutual funds are becoming so popular that even the venerable fund-monitoring firm Morningstar, Inc. began rolling out Morningstar Ratings for separate accounts in October — including one for the biotechnology sector.

Such funds are food for thought for biopharmaceutical firms and for the people who invest in them. With traditional mutual funds embroiled in illegal trading practices and price-fixing scandals, more investors might turn to "personal" mutual funds to take advantage of the burgeoning biopharmaceutical industry.

Heck, some industry players may even want to build their own biopharm portfolios themselves.

With more options these days, they can if they want to.