The Future of Advice Delivery: What Will Solutions Look Like?

This is a summary of a session from the FRA’s 11th Annual Managed Account and UMA Summit that was held in September 2013 in NYC.

Moderator: Walter Hartford, VP, Business Development, F-Squared Investments


Unified Managed Accounts (UMA’s) are not a silver bullet

What the managed accounts industry needs is new investment options, not new account types, Shkuda contented.  UMA’s are not a silver bullet that can solve all of a client’s investment needs.  What’s inside an account is more important than the account structure, she claimed.

Shkuda proposed that UMA growth has been flat for the past few years because the strategies being offered aren’t providing solutions for what clients perceive to be their needs.  Managed account providers must improve on their track record of innovation in order to increase market share, she suggested.

The following three rules were offered by Shkuda for the industry to be more innovative:

1) What has worked in the past, won’t work in the future – mainly due to increasing levels of competition
2) Firms must continually re-invent themselves – especially larger sponsors and wirehouses who are often afraid of cannibalizing their existing business
3) Think outside the box Continue reading

6 Keys to Launching a Successful UMA Program

This is a summary of a session from the FRA’s 11th Annual Managed Account and UMA Summit that was held in September 2013 in NYC.

Moderator: Bill McFadden, U.S. Business Development, CGI

Chris Gibbons, VP Investment Product Management, PNC Asset Management
John McDevitt, CFA, SVP, Brown Brothers Harriman
Sophie Schmitt, Senior Analyst, Wealth Management, Aite Group

1. Centralize investment management processes before launching a UMA.

Schmitt explained that it would be easier for firms to launch a UMA if their investment management was centralized, since the advisors would already be used to outsourcing these decisions.  Advisors are creatures of habit and prefer to sell products with which they are already comfortable, she said.

Brown Brothers made that decision a few years ago and it was a struggle, McDevitt reported.  One important factor was communicating to their advisors that it was better for their clients to have a dedicated asset allocation team that could provide proprietary investment products along with third party mutual funds, he said.

According to Gibbons, PNC rolled out their UMA solution in late 2010 and they are now closing in on $4 billion in AUM.  While much of their growth was mandate-driven (the stick), it was easier because they already had a centralized investment management and asset allocation infrastructure in place. Continue reading

Model Delivery is Risky Business, According to Manager Survey

Most investment managers believe that the risks associated with communicating model changes to sponsors are significant and have the potential to result in negative impact to their firms. This was one of the results of a survey done by Dover Research as reported by Jean Sullivan at the Financial Research Association’s 9th Annual Managed Account Summit, which took place in Boston last month.

Jean reported that model managers support an average of 6.5 model platforms each, with some managers supporting as many as 20 different sponsor platforms!

47% of managers surveyed say that they support fewer than 5 platforms, 37% support between 5- and 10 platforms and 17% support more than 10. These additional linkages can lead to elevated risk, Jean warned.

Jean told us that every investment manager that Dover spoke to is concerned that sponsors won’t be able to implement their trade instructions accurately. This is complicated by the numerous proprietary communication infrastructures developed by sponsors with many variations existing on multiple dimensions such as different delivery mechanisms (email, fax, web portals) and different messaging formats.

Sponsor Trading Constraints Are a Concern

A big area of concern for managers is trading constraints, Jean noted, due to the following issues at sponsor firms:

  • limitations in data formats
  • sponsor weight and volume restrictions
  • basis point limits
  • inability to implement price limits
  • inability to put securities on hold for more than 30 days
  • constraints on the number of trades
  • inability to implement international strategies

Three Types of Model Risk

Investment managers in the Dover survey identified three different types of potential risks that arise from model delivery:

  1. Reputational – defined as performance dispersion due to the inability of the sponsor to implement the manager’s model. This could be caused by a manager wanting to make an intra-day model change, but can’t because the sponsor doesn’t support it.
  2. Best Execution – defined as the inability of the sponsor to achieve best execution due to trading restraints. Trade rotation processes influence best execution, because there is no automated feedback regarding trade execution, so the manager doesn’t know when their trades have been executed. It could be due to sponsor firms competing against each other in the market. It could also be due to delays in communicating model changes.
  3. Operational – defined as the increased risk of errors due to the manual nature and inconsistency of the current model update processes. For example, if the manager’s operations staff makes an error in a model change, the manager is then responsible for making sponsors and their clients whole, even if the mistake isn’t discovered until months later. This is an area of significant cost and concern for investment managers.

The managers were then asked to rate which of these risks are “significant”. 50% selected operational, 45% said best execution and 17% chose reputational.

Due to the many issues arising from model communication, many managers are starting to build out their own model validation processes to reduce manual error and monitor best execution at the sponsor, according to Jean. Also, 67% of managers believe that a centralized model service that provides a standardized method to implement and monitor trade rotation would reduce risk.

The Model Management Exchange (MME) from DTCC is such a centralized model service, Jean said. It is secure and redundant communication system with integrated audit trails incorporating validation and confirmation features. It can also facilitate the trade rotation process, but this would require sponsors to send their execution data to DTCC.

The industry should take the opportunity to do something now to address the risks surrounding model delivery, urged Jean. I agree that something should be done, but what exactly?

Before anything can be done, both sponsors and managers should agree that they must work together to solve the problems. The risks expressed by managers are due to a complex mix of factors and cannot be easily mitigated and especially not in isolation.

A centralized model hub, such as the DTCC’s Model Management Exchange (MME) or Fiserv’s Model Information Exchange (MIX), which is planned for 2012 release, could help, but only if they achieve critical mass and then they can only help on the communications side. Risks that are due to specific sponsor’s model policies (i.e. Inability to implement price limits, trading windows) or manager operational issues (manual errors) will still exist no matter how the model information is delivered.

Are Managed Accounts Obsolete?

This post is a summary from a session at the Financial Research Associates 9th Annual Managed Accounts Summit in Boston, MA.

These are three of the most frequently asked questions regarding the managed solutions industry according to David Gardner, Principal, Smart Consulting Firm, LLC.

Are managed accounts obsolete?

David informed us that managed solutions today are far from dead and are, in fact, alive and well. But we shouldn’t lump all advisory solutions together, he warned. As reported by Dover Research in the most recent edition of MMI Central (see the table below), Managed solutions reached $2.3 trillion in total AUM as of 2Q 2011. This was a 3.1% increase from 1Q 2011 and a 31.8% increase from 4Q 2010.

Clients are no longer seeking products, but solutions, David advised. They want greater rationalization, efficiencies of holding disparate assets, styles and strategies on a single platform.

Will the UMA kill off the SMA?

SMAs are far from dead, David continued. Third party, actively managed investment strategies provided by professional managers in fee-based accounts are still a viable part of our industry, he insisted.

Third party managed accounts for both sponsors and investment managers had trouble achieving operational scale when they maintained duplicate infrastructures that lacked standardization, according to David. The advent of UMA model portfolio programs provided efficiencies in areas such as investor profiles, account maintenance, custody, and trade execution, which helped firms deal with operating margins that have been declining over the past two decades, he said.

As of 2Q 2011, the SMA market showed a respectable growth rate, relative to the broader equity markets, growing by 2%, with $6 billion in net new flows, which is a positive indicator given the current market environment, David acknowledged.

From 2008 AUM until 2Q 2011 assets have grown steadily in SMA Advisory. During this period, as reported by Dover Research, SMA assets grew from $476 billion to $596 billion, which is a 25% increase. The growth of SMA assets has been in a steady decline since their peak in 2003. UMA market segment grew the fastest (7.7%) of all segments in the last quarter. It was largely attributable to newly launched programs, David said. SMAs aren’t going away, he assured us, they just have found a new home. They’re relocating onto UMA platforms with a lot of new friends living in the sleeves next door such as ETF, mutual funds, fixed income, multi-currency and alternatives.

It’s not SMAs vs UMAs, David argued, since SMAs have always been an available component of a UMA.

Are UMA model portfolios just a way to marginalize manager intellectual capital and compress their fees?

David’s point of view is that managers shouldn’t look at model portfolios in a negative light, they should look at them as a way to unburden themselves from maintaining a duplicate client account infrastructure. Model portfolios, he added, allow managers to do what they do best, which is managing money.

David pointed out that this is an age-old efficiency question with SMAs. As a manager, would you rather compete for a piece of a slower growth pie of SMA Advisory, and accept ever declining margins, or focus on the UMA model portfolio market, which is growing exponentially, although with lower, yet very stable fees, but with less overhead cost?

DTCC projects that the number of models being distributed will grow from 1,100 today to over 13,000 by 2015, David reported.  They also project in the same timeframe that half of SMA assets will convert over to UMA platforms.  They’re seeing announcements every day as more sponsors commit to wholesale conversions of their existing SMA relationships into UMA model portfolios, David confirmed.

David summarized by saying that UMA model portfolios allow managers infinite scale and efficiency to deliver not only their intellectual capital but also new products with increased profit margins and increased operational efficiencies.

Managed Accounts: Future Trends, Projections and Opportunities

This post is a summary from a panel session at the Financial Research Associates 9th Annual Managed Accounts Summit in Boston, MA.

Moderator: Phil Masterson, Managing Director, Investment Manager Services Division, SEI.

Panelists: Andrew Clipper, Managing Director, Citi Investor Services, Tracy Gallman, SVP, Investment Products & Platform Development, LPL Financial, Paul Oliu, Director of Business Solution Strategy, Fiserv Investment Services, Jeff Strange, VP, Strategic Planning, Cole Capital, Russell W. Tipper, Director, Managed Solutions Group, Merrill Lynch Global Wealth Management, and Chris Wager, DMA Product Manager, Advisory Products Group, Wells Fargo Advisors.

Where are the assets flowing from the standpoint of the managed accounts solutions segment?

We’ve seen a return to outstanding flows for the advisory industry as a whole, with approximately $50-$70 billion of net inflows per quarter across different managed account programs, according to Jeff. We’re almost at the point where we have more assets than before the financial crisis. Separate account programs has been the exception to this, since we’ve just recently started to see net flows turn positive and those are really just going into dual contract programs, he said.

Most of the focus of the industry has been rep-driven programs, which have been pulling in around $20 billion per quarter, Jeff reported. We’ve seen a little bit of a turn towards SMA flows. New sales and asset growth in UMA has been around 35%, while SMAs have been growing at around 2%.

The growth in traditional SMA’s has been more in international equities and municipal bonds, while UMA programs are still mainly concentrated in large cap equities and doesn’t have critical mass to diversify into too many styles, he said.

Similar trends are occurring in Citi’s managed account programs, Andrew reported. They’re seeing large movement into SMA space, less into UMA, with a tremendous movement into dual contract programs and away from single contract programs. On the sponsor/distributor side, they’re seeing growth of over 3,000% into the UMH space.

Where do you think flows will be going from the solution segment perspective as well as the asset cost perspective?

According to Russ, the easy money says that client-directed and RPM are where the flows are going to be. But in this market environment, they’ve been seeing more traditional nine box, asset allocation-driven investments within SMA and UMA.

Merrill’s clients aren’t asking for relative performance anymore, they’re looking for absolute performance due to market volatility, Russ asserted. RPM has more flexibility to look towards absolute performance products, however, over the longer run, we’ll see a return towards more active management outperforming more traditional asset allocation, he believes.

While RPM is the fastest growing product type, there are serious scalability issues with RPM as well as client-directed programs, which have a growing base but absolutely no scalability. Client-directed is largest advisor program at Wells Fargo, but scalability is a real concern, according to Chris.

At LPL Financial, they’re starting to see an increase in the use of ETFs through separate account managers, Tracy announced. This brings more of a tactical approach and provides the ability to go to cash or move into different sectors. Individual equity positions are being replaced with ETFs, which is a trend that’s going to continue, with mutual funds possibly being used more as core with ETFs as satellite, she said.

Could you define UMH and contrast it with UMA from the perspective of an investor, manager and sponsor?

A UMA is an account that is typically invested only in equities, ETFs and mutual funds and is rebalanced by an overlay manager, Andrew suggested. It exists as a separate, siloed product from wrap mutual funds, RPM, RAA, SMA, he added.

UMH is more of a delivery mechanism for the investor, Andrew continued, and allows for the elimination of product silos so that the investor can have a holistic rebalancing across all security types across all of their accounts. Citi has being running UMH in production since 2009, he claimed.

Andrew explained that there are three key components to a UMH: Household-level rebalancing and performance, asset aggregation across multiple books and records platforms and tax and cash flow optimization.

A typical independent financial advisor might have accounts at three or four correspondent clearing firms and broker-dealers and the last thing an advisor wants to do is to tell their client that they have to do is move their accounts and repaper them, Andrew commented.

The ability to aggregate assets across multiple brokerage firms requires a tremendous amount of connectivity, he asserted. More than simple aggregation tools like Yodlee, but actual electronic connectivity to the financial institutions.

But it’s more than just reporting, Andrew warned. You must be able to selectively aggregate at the portfolio level, which could be multiple accounts, but not all accounts, in the same household. While a manager sleeve, such as large cap growth, still exists, sleeve level performance itself doesn’t exist, it’s just part of the overall household performance. Individual manager performance also doesn’t exist on a segregated basis in an UMH account, Andrew contended.

I would disagree with Andrew on this point. I believe that just because a sponsor doesn’t need to report individual performance, there are still important reasons for sleeve-level reporting. Corporate actions, for example. How are they handled when the same security is held by two or more managers in the same UMA? Without sleeve-level identification of tax lots, managing corporate actions is difficult, to say the least. — Craig

For UMA sponsors, what is your focus on client segments?

Merrill Lynch has multiple investment platforms, Russ explained, and they break them out into three legs: FA-directed, client-directed and firm-directed.

UMA is the chassis on which they want to deliver all of their firm-directed advice, he said. What previously required multiple programs containing traditional separate accounts, mutual fund wrap or other programs are now all rolled up into UMA. They have the ability to provide tax optimization, to rebalance across multiple investment vehicles, and sleeves as well as ability to have a stand-alone offering or allow FA’s to build their own offering through our line of all due diligence, covered strategies, Russ offered.

Customized offerings are constrained to those assets in the program and by registration type. But they have a platform that has the ability, through common pricing, common reporting and common rebalancing to deliver a true UMA, he claimed.

Looking ahead over the next few years, Merrill is driving to take the next steps and get closer to UMH, Russ said, confidently. They’re going to be creating a single advisory program that will have RPM, client-directed and firm-directed in a single contract under a single pricing schedule under a single reporting tool. For advisors, it takes the complexity, such as pricing arbitrage and reporting arbitrage, out of delivering advice.

They won’t have a full UMH, in the near future, where they can go across multiple registration types or across different product sets. However, Russ assured us that they’re looking to expand the breadth of investment offerings in their UMA program.

UMA definitely is garnering a lot of attention at WFA, Chris said. From a product-enhancement perspective, that’s where they’re spending most of their time. They’re not pushing one advisory program over another. Overall, UMA is the most immature program and there’s a lot of room for improvement and growth. There’s not been a lot of work being done in the UMH space, he confided.

Because of the independent culture and having financial advisors who want to use their own technologies, LPL has a different approach from these other firms, Tracy told us. They have established unified managed accounts that can handle all investments. Their advisors like to control reporting to clients, so instead of coming up with a single, unified approach, they provide a robust set of tools and allow advisors to take their own approach for their practice. The investing is more centralized, but the management tools and reporting tools can be customized by their advisors, Tracy added.

What is your experience with the willingness of managers to join models-only programs?

Fiserv has 3,500 third party models on their platform, plus maybe double that in internal models, Paul reported. They’ve seen that 85-90% of SMA managers use or manage to models. Fiserv believes this to be a long-term trend, with tremendous efficiencies to be gained, he said.

One of the biggest catalysts for models-only programs is the drive towards UMA, Paul explained. It’s the account structure that Fiserv is advising their clients to implement. From the ability to offer advice and product neutral solutions, the UMA facilitates this.

Paul referenced MMI’s third quarter newsletter (MMI Central), which contains an article titled, “Market Uncertainty Causes Industry to Pause”:

Our interviews with industry leaders indicate that financial advisors and investors are staying the course, at least for now. No significant trends have emerged across the advisory industry such as material shifts to cash or movements between advisory programs or among asset classes. This may be the calm before the storm. Or, it may be that sponsor firms are more prepared to address investor concerns. Enhancements to advisory programs, such as enabling investors to hold up to 35% of advisory assets in cash, the introduction of more tactical managers and better prepared advisors will help to quell investor fears in the short term.

A lot of Fiserv clients want to take a step back and look at model management very broadly, Paul continued. They want to make sure they have an effective model management process that is effective from the idea all the way through to implementation and reporting.

Fiserv is consulting on many levels with their clients, Paul said. Not only about implementing their UMA programs, but also their model management process. “Clients want to implement it right the first time,” he insisted.

Wells Fargo is in the process of moving to a models program and have been doing a lot of due diligence and talking to a lot of managers about providing their models, Chris informed us. Almost all of the managers they’ve spoken to are open to the idea of providing models. 95% already provide models to another sponsor firm. From the Wells perspective, the willingness is definitely there, it all comes down to the specific strategy, he assured us.

Russ told us that Merrill has already migrated their traditional separate accounts program entirely to models only. 99% of their existing managers agreed to participate in the program. It’s a bigger mindshift for larger firms, Russ claimed, since they have to give up trading control and due to the fee impact. They allow some managers to step in and they manage dispersion, he said.

This post is part 1 of a multi-part series. Additional posts are on their way that cover the rest of the panel sessions.

Now that you’ve read the entire article, did you agree with everything written? Did you disagree with anything? Either way, let your feelings be known by posting a comment below!

Why Bother Using an SMA Outsourcer?

This post is a summary of a session from the FRA’s 8th Annual Managed Accounts Summit.

According to a recent report by the Tower Group, the use of “cloud services” will become mainstream by 2015, stated Seth Johnson, CEO & Co-Founder, Redi2 Technologies. They will slowly evolve into public utilities that integrate traditional licensed software, augmented by vendor domain expertise. Cloud services currently represent just 1% ($4 bil) of total IT spending, but are projected to grow to almost 5% ($22 bil) by the end of 2012.  Now, I’m not sure if Seth was referring to total IT spending by Wall Street or overall IT spending.  I found an article referencing a report by IDC that estimates that 15% of IT budgets will be tied to cloud computing in some way by the end of 2011!  This is a big difference but still makes Seth’s point that cloud computing is something you shouldn’t ignore.

What are you seeing by way of industry developments in outsourcing?

SEI has seen more RFPs for SMA outsourcing services in the past 6-8 months than in the previous four or five years, according to Carmine Remo, Managing Director, Head of SMA, SEI.  Specifically, as it relates to the wrap business, he said that models only trends have really cut the number of accounts that investment managers have to take care in their back office.  The trend around models only has really shrunk the manager’s back office and forced them to focus on their core business.  This hasn’t done much to reduce manager’s fixed costs, but has reduced their variable costs a bit, Carmine noted.  One of the key things to look for in outsourcing is the ability to scale both up and down as needed, he advised.

Speaking of scalability, SEI just announced that it has extended its relationship with RiverFront Investment Group, LLC to provide operations outsourcing services for the firm’s separate account business for an additional three years. Riverfront cited the scalability of the SEI platform as one of their deciding factors.

Why Outsource?

Most firms use outsourcing to get access to an expertise that is hard or expensive to maintain on their own, Carmine observed.  For example, fixed income strategies are getting more shelf space and firms lacking fixed income expertise can connect with an outsourcer to provide it for them.  SEI is helping PIMCO launch a municipal bond ladder strategy. (see press release here) “Who’d have thought we’d be seeing a muni bond ladder strategy in an SMA WRAP space?”, Carmine asked.

How can you help investment managers deal with the competitive pressure to reduce their fees?

Joseph DiTalia, Director at Citigroup, questioned whether outsourcing is an efficient, cost-cutting measure?  At Citi, cost is just one component and they don’t focus on it.  “We see it as a way to create value for our clients”, he emphasized.

It’s critical to have a predictive cost model whether your growth is up or down.  And according to recent research, managers consider accuracy as well as cost when looking at an outsourcing provider, Joseph countered.

What are some of the ways that an outsourcer can improve operational efficiencies?

Whether a manager is looking at Citi for outsourcing services in the retail SMA space, wealth management solutions on the distributor side, or institutional middle office services, the bottom line is that they’re really looking for a partnership.  They want to integrate their business with the broader services that an outsourcer can support for them, Joseph asserted.

When you think about some of the things that have been discussed in earlier sessions about data integration, one question keeps coming up, Joseph noted.  What do you do with that data?  How do you provide data in a meaningful way to management and stakeholders?  An outsourcer can provide a suite of services that would normally require a manager to partner with a number of firms and put them together, he said.  The outsourcer handles the integration, the vendor management and the ongoing development of the platform to take more off of the asset manager’s plate.

Long term from a quantitative perspective, one area where Citi is creating value for  managers is the concept of alpha, Joseph explained.  There are different sources of alpha, it’s not solely an aspect of performance.  One additional source of alpha is operational alpha.  Citi will be publishing a white paper that details how efficiencies in investment operations from outsourcing can help managers “capture 150 to 200 basis points in performance improvement for the end client.”  Not only by allowing managers to focus on their core competencies, but by driving areas of enhancement and development that come from using more integrated platform, he argued.

SMAs That Act Like Alternatives

This post is a summary of a session from the FRA’s 8th Annual Managed Accounts Summit.

While many money managers have been switching client assets into alternatives in their search for better returns, David M. Spungen, Chief Executive Officer of Hillview Capital Advisors, LLC, believes this is a bad idea. For a taxable individual, alternative investments, particularly hedge funds are extremely tax inefficient. They’re also expensive in terms of fee structures versus separately managed accounts.

According to David, Hillview does their own research and tries to locate managers that operate like alternative investments. They must be in separate accounts, with generally very workable minimums and reasonable, flat fees.

For example, Winward Investments (which was purchased in August 2010 by Charles Schwab for $150mm) has been successful in attracting assets from individuals, RIAs and large institutions, David revealed. When Hillview found them back in 2003 they were managing only $200mm.  By the time they were acquired their AUM was $3.9 billion.

What Winward has done is similar to what most fund of hedge funds are pitching, David said. Good risk adjusted returns, with much less volatility, and less exposure to a significant decline in equity markets. They have daily liquidity, a fair amount of tax efficiency, flat fees and total transparency. Winward runs essentially a global, multi-asset class strategy. They were also one of the early adopters of ETFs, which, David suggested, is one of the reasons that Schwab bought them.  (for more info, click here to read an interview with Stephen Cucchiaro, President, Windward Investment Management)

In 2008, Hillview started using a strategy that invests in both fixed income and closed-end funds on a hedge basis. It’s very tax-efficient since the fixed income side is invested munis.

David explained another reason for their tax-efficiency. If closed-end funds go to significant discounts to NAV, a lot of them overpay their dividends. They may go to a managed distribution policy and decide to pay 7% a year, for example. Hillview may earn 3% in dividends and another 2% in realized capital gains, which is basically just returned capital. So a lot of the return they get winds up being returned capital, which is very tax efficient, he explained.