Q: What's your philosophy for managing the individual investors accounts?

A: I believe that separately managed accounts are becoming a real alternative to mutual funds, as they provide a number of benefits. Clearly, the flexibility to customize the portfolio is such a benefit. Investors can exclude certain individual companies or industries if they have concerns about social responsibility, or if they work with a high-tech company, for example, and already have adequate exposure to that industry through their stock purchasing plan.

The other benefits of SMAs, at least with Curian, include the transparency and the ability to go online and look at all the individual holdings, and their price on intra-day basis, if you have that level of interest. It is your portfolio and you're not co-mingled with other investors' assets, so you're not influenced by inflows and outflows within the mutual fund.

That can make a big difference particularly for taxable investors. When you open a SMA account, you establish your cost basis as you open the account, so you don't have the embedded tax consequences of mutual funds. When buying a mutual fund, you're essentially buying the history of that fund. If there are embedded gains, they become a tax liability even though you didn't benefit from these gains in previous years. So from a tax situation, there are significant advantages to a SMA.

Compared to other separately managed accounts, Curian offers the ability for the common investor to benefit from the investment style previously reserved for the ultra high net worth investors. The investment minimum used to be approximately $250,000 per manager, but through technology, Curian has been able to offer up to four managers in a diversified portfolio with an investment minimum of $25,000.

So we're opening the door for more investors to take advantage of a separately managed portfolio. Another differentiating factor is that we have the same SMAs for the very large clients and for the smaller clients. In other words, we manage the accounts in a more uniform fashion as opposed to choosing from different SMAs depending on the size of the client.

Q: What's your approach when you create these customized accounts? Do you have several pre-defined varieties or you take one client at a time?

A: We certainly address one client at a time. It's a matter of focusing on asset allocation, on the right asset classes and the right mix to address the investor's long-term objectives. Then it's a matter of selecting the right managers that fill that asset allocation pie and that's where we apply most of our effort. We aim to find those institutional managers that fit well together as a group and achieve competitive returns.

We mix those managers as opposed to asking the advisor to take the responsibility of choosing among an array of managers. That challenge is the same as picking and choosing among thousands of mutual funds, and often the advisors don't have the resources to do that effectively. If they're the ones responsible for finding the best manager or the best mutual fund, that takes time and effort away from growing their business and attracting new assets. So what Curian does is select quality institutional money managers to fit their client's objectives.

Q: What type of customizations do you find most popular in your segment? Also, what are issues that come up in terms of reporting, transparency, and monitoring?

A: There's a significant number of investors that are taking advantage of the ability to exclude securities from their portfolios. Probably more than 20% of our clients take advantage of these restrictions because they have socially responsible motivation in their investment strategies.

What we do in terms of reporting, we take advantage of technology and web access. Advisors and clients have access to their portfolios on a 24/7 basis. They can review not only the individual holdings, but also their current and past statements, as well as the investment policy statement that they establish when they open the account. All their preferences included in the investment policy statement are at their fingertips whenever they have access to the Internet. So from an information and client service standpoint, we've leveraged the technology to provide complete access to the account. We've gone to the extent that we can go paperless, but we also offer paper statements for clients that are more comfortable with such type of reporting.

Q: Could you explain your research process in more detail, including the research on managers?

A: That's a great question because that's where we put most of our effort and resources. We partner with an institutional consulting firm, CRA Rogers Casey, which is one of the industry's largest institutional consulting firms. They're working with large pools of money, including Fortune 500 companies, large endowments, or foundations related to universities or hospitals.

They're actually out there selecting, evaluating, and doing due diligence on hundreds of money managers and they've built a database of about 1,400 different managers that they're very familiar with. They have every statistic you can imagine on those managers, but they also focus on some qualitative aspects, including the personnel that created the track record, the structure of the organization to keep them motivated, the rules allowing key investment personnel to focus on managing money, not on administrative or client service responsibilities, etc.

We have full access to their database and their consultant expertise of what makes a manager successful. Then we look for the managers that fit well together and create a portfolio that we think works well for our client.

Q: Do you search within this database for every new client or you've narrowed down the universe to 20 or 30 managers you usually work?

A: It's primarily looking at what we already have on the platform and if there is something we can do to improve the risk/return characteristics of the entire portfolio, and what type of manager would do that. So we'll go to CRA Rogers Casey and suggest that we want to find this type of manager and we'd like to focus on these characteristics that fit with the rest of the managers on the platform.

We differ from other SMA providers in that respect because we don't just bring a stable of managers for the advisors to pick from, but we assemble the managers in a portfolio that's delivered to the client. So we're the ones that make sure that these managers fit well together.

We have one model portfolio of managers, and then the allocations amongst asset classes are customized for the clients in 320 different models. But our clients essentially get access to the same four managers in our platform, while the allocation to those managers are customized relative to their objective.