Q: Who should consider investing in separately managed accounts? What are the benefits of this type of investing?

A: Separate accounts are particularly attractive to high net-worth individuals who want a higher level of control over their portfolios, but still want to have professional money management. I believe that separate accounts have several advantages over a mutual fund, which is the other prmary managed vehicle for an individual.

The first advantage is quite direct - the larger the account, the lower the fees. As a percentage of assets under management, the fees get lower as the size of the account grows. With a mutual fund you pay the same percentage across the entire account. That’s great for small investors who get the same fee as large investors, but large investors can obtain better fees.

Second, there are significant tax advantages. With separate accounts the cost basis is established at the time the money manager begins to buy stocks or bonds for the investor. With mutual funds, there can be capital gains embedded when you buy a share of the fund, so you are incurring the liability for these gains immediately. A lot of investors overlook the fact that if it’s a good fund, it should have capital gains already accumulated. For a small or nontaxable investor that may be insignificant, but for a large investor, it’s a meaningful drag on returns.

Also, most separate account managers would consider taking losses for their clients at year-end if such are needed for a tax loss. We receive requests in November and December to see if we can produce losses. Sometimes we’re not able to do it, either because there aren’t any losses, or because it’s not advisable in a certain stock, but this is common practice. You certainly can’t have that type of input as a mutual fund investor.

Finally, a number of investors take advantage of their ability to restrict the separate account manager from buying certain stocks. This can be a matter of conscience as in the case with tobacco or alcohol producing companies, but there are also practical business restrictions. For instance, if an individual is the manager of a pharmaceutical company, he may already have the lion’s share of his net worth tied up in pharmaceuticals, so he may not want any further exposure to that industry.

Overall, a separate account manager can customize the portfolio in a way that cannot happen in a pooled account. Mutual funds are wonderful, but they’re ideally suited for the small investor. The larger one’s assets become, the less attractive the mutual fund format becomes.

Q: Could you give an overview of what Gallatin Asset Management does?

A: Gallatin Asset Management was set up last year as a subsidiary of A.G. Edwards, Inc., but even though it’s a new company, its business is not new. Overall, we either manage directly or advise the broker/dealer on assets of about $20 billion. There are two primary sides of Gallatin - the separate account management business and the manager evaluation business.

The separate account management is a successor of A.G. Edwards Asset Management. We manage equities, fixed income, and ETFs, or exchange traded fund portfolios. The traditional stock and bond separate account business manages over $2.4 billion of assets, while the ETFs have about $4 billion under management.

The manager evaluation business is analyzing both separate account and mutual fund managers. That’s the successor of two research groups within A.G. Edwards, which we put together into one unit. They advise Gallatin’s money management business and A.G. Edwards & Sons brokerage business regarding the managers that the clients would want to consider. We advise the broker-dealer on about $5 billion worth of mutual fund portfolios and $8 billion worth of separately managed account portfolios.

Q: What are the investment minimums at your company?

A: We have relatively low minimums for in-house money management programs to give the financial consultant as many options as we can. The equity program starts at $50,000 and the fixed income program starts at $100,000. For programs that utilize outside managers, the minimums vary depending on the manager. Some of them start as low as $50,000, but some of them run much higher, all the way up $500,000.

Q: What’s your approach to building the separate accounts? Do you rely on a collection of strategies to meet the client’s requirements?

A: We usually leave the primary issues of strategies selection to A.G. Edwards fi- nancial consultant because he’s closer to the client and knows the specific needs better. But we offer a number of different strategies and we can do an individual search for clients. We employ staff that looks at client’s needs, and particularly, if they need a certain type of manager. In such cases we’ll search for that manager and respond back with a narrowed list of three managers that we believe fit the bill.

If the clients need a diversified portfolio, or if they don’t have any idea what they need, we have two programs they can go with. In the Select Advisor program we come back with recommendations for a portfolio of managers. But again, the size of the account, the needs of the client, his investment objectives and risk tolerance, are very important in providing cost-effective diversification. In another program, clients can select some pre-assembled diversified models of money managers. We have over 40 managers on our reference list, which grows all the time, and the client can choose the model according to his objectives and risk tolerance.

All the models are derived from our investment strategy committee’s recommendations on asset allocations for our clients. The committee consists of 11 strategists and analysts drawn from all disciplines and ranging from individual market and asset class strategists to money managers. We develop asset-allocation models that are based upon time horizons, investment objectives, income needs, and risk tolerance.

We have a total of 10 models divided in two sets. Five of the models have long-term goals and 10-year time horizons, while the other five are intermediate-term models with three-year time horizons.

Q: Do these models change over time? Is there any specific strategy behind them?

A: The pre-selected account management program uses strategic models that don’t change often because they’re based on very long term time horizons. We believe that investors who truly have longterm horizons, should not be making shortterm adjustments to the portfolio, except for the periodic balancing which usually takes place on an annual basis. We don’t think there is a need to do much more than that, but the asset classes used in those models depend upon the individual investment objectives of the client.