Separately managed accounts may offer skittish retail investors a practical path back on to the investing track, if brokers are able to clarify their value propositions for clients and prospects, and demonstrate that they are listening to client needs according to a new study from TowerGroup Research.

The study notes that flight by retail investors to cash and cash-equivalents will not quickly abate.

According to the study, the last five years have witnessed a massive flight from equities to “safeties.” From 1998 to 2003, the assets in cash and cash-equivalent accounts in the U.S. rose from US$3.6 trillion to US$6.2 trillion, a 72% compound annual growth rate. These assets now equal the entire amount of money invested across all mutual funds in the U.S.

TowerGroup says many retail investors will return to the markets via SMAs, which are likely to become the predominant vehicle over the next five to seven years for individual ownership of securities.

TowerGroup believes that assets held in SMAs will grow at a compound annual growth rate of 18.5%, bringing total assets from US$399.7 billion in 2002 to US$1,105 billion in 2007.

“Today brokers and investors are both struggling to understand each other again, as they attempt to revitalize a heavily damaged value proposition,” said Dennis Ceru, director of Retail Brokerage & Investing, and author of the research.

“While investors want to believe in the market again, the securities industry needs to give them a good reason to come back,” he added.

Ceru noted that this point cuts to the heart of the opportunity for securities industry participants. “Retail brokers must clarify their value proposition to their client base and prospects. The key is listening to clients, creating a holistic and rational method of reaching key financial goals, and maintaining a clear understanding of a client’s tolerance for risk. In short, it’s time for the industry to step up and reclaim its rightful position as trusted financial advisors,” he said.